Which Strategy

[wayneL]

Guys,

As an exersize, I would like to get the opinion of forumites as to how they would trade this situation:

The stock is ELN and it is trading at $26.76. My view is that it has swung low and I anticipate that it will trade to in excess of $30 within 4-10 days. Trading as low as $25.40 will cancel my analysis.

So as a straight out stock trade we have a projected risk/reward of roughly 2.5:1 as a minimum. Of course stops don't protect from gaps down.

My question to the forum is how you guys would trade this scenario with option...long or short options, spreads whatever...the relavant quote attached.

I don't have access to previous iv data, but it is currently, obviously, quite high.

Cheers

 

[crashy]

Given your timeframe and price limits, and bearing in mind the high IV:

- you cant buy call options
- you cant write put options

you have a target of 30, what if it goes above this?

I would:

write 10 x 30 put @ 402 = +40200
buy 10 x 25 put @ 130 = -13200
write 40 x 30 call @ 85 = +34000
buy 10 x 25 call @ 300 = -30000

net credit = 31200

max loss = -18800 (below 33.70)
max profit = 81200
profitable between 25.95 and 32.7

 

[wayneL]

Crashy,

That certainly looks like a great strategy for the parameters I mentioned. Does it have a name?

Would you be concerned about early exersize of the ITM written put leg?

Thanks for the input!

Cheers

PS I was lurking on a chat that involved Chris Tate. He made the comment that "Option buyers make all the big money" (paraphrasing). I was intrigued, because that is the opposite to what you normally hear...and most people experience. i didn't think that he was refering to spreads involving bought options either.

Comments?

 

[crashy]

no name for that strategy.

I prefer to leave the names out of it, because it limits your creativity. Ohh cant do that, it doesnt have a name! You have to think outside the square.

not too worried about early exercise if IV is as high as you suggest.

re Chris Tate, was this a comment based on the current market? XJO options are very cheap on IV basis and have been for a while. In fact IV is low across the board. In a raging bull market like we have been having, you dont want to be the writer thats for sure, unless its puts you write.

I did have a lovely excel sheet I tried to post but the file size limit here is a joke.

cheers

 

[wayneL]

>>re Chris Tate, was this a comment based on the current market? XJO options are very cheap on IV basis and have been for a while. In fact IV is low across the board. In a raging bull market like we have been having, you dont want to be the writer thats for sure, unless its puts you write.<<

I did not ask him to elaborate, as was lurking amongst some very novice traders and they were asking very basic questions (it was in conjunction with Loiuse Bedford if that gives you an idea )

It pricked my ears, as I have a natural aversion to capped upside, as is the case with written options. Intellectually, I have nothing against it per se ( apart from the exaggerated claimed returns) . But psychologically I would find it impossible to trade that way.

This is the same reason I find your fold lines post interesting. Not that straddles are so startling, but rather the time frame. I mean Doh! I trade that time frame every day of the week, but never looked at straddles from that point of view before. The shorter time frame changes the risk/reward dramatically.

Cheers

 

[positivecashflow]

I don't have access to previous iv data, but it is currently, obviously, quite high.

Heres a volatility chart for ELN...

Cheers,

J.

 

[wayneL]

Heres a volatility chart for ELN...

Cheers,

J.

Pos, Is taht a subscription service, or free to air ?

 

[positivecashflow]

Hi WayneL,

It's free from my broker's site.. though you have to open an account.. www.optionsxpress.com.au

Here's a good site for you if you haven't been there already:

http://www.ivolatility.com/

Cheers,

J.

 

[wayneL]

Update on ELN:

Ahahahahahahahahhahahahahha A case for never having unlimited risk!!!!!!!!!!!!

http://www.vw-organics.com/x_ELNgap.htm

Cheers

 

[positivecashflow]

Gotta love that gap...

 

[positivecashflow]

Check out the volatility spike on ELN,

WayneL are you trading this puppy?

 

[wayneL]

I do trade it....but unfortunately or fortunately, was not on it at the time.

Long puts woulda been nice eh?

 

[positivecashflow]

Do you think it'll trade sideways for a while? or will the momentum take it down further?

 

[positivecashflow]

Heavy volume today... opened and closed at $8 though the high was $18!

 

[wayneL]

$18 must have been a dirty tick.

I've got a high of around 8.20. But where she goes? Dunno, big gaps confuse the crap out of me...usually get them wrong

 

[positivecashflow]

You are right about that dirty tick.... Not sure how they got that...