dndn option play, looking for advise

N

newguy05

trying to get back in the option fun, very rusty.

what do you guys think of the following play on dndn for may expiration

1) short 1x atm($40) straddle
2) long 1x otm strangle at 10 pt out ($50C, $30P)
3) long 1x otm 50C (load the wing on 1 side)

This is based off my assumption the stock will either not move much (short vega) or move higher after news ( long gamma on call side). If i am wrong, my loss is defined.

P/L chart:

Price Profit / Loss
22.50 ($465.00)
30.00 ($465.00)
30.18 ($447.30)
34.65 $0.00
38.26 $360.80
40.00 $535.00
45.35 $0.00
46.34 ($98.80)
50.00 ($465.00)
54.65 $0.00
62.50 $785.00
 
NewGuy ...

Your suggested trade is a slingshot .... a 30/40/50 butterfly with an extra 50 call wing ... given IV north of 100%, the embedded 40/50 call backspread [-1/+2] is relatively expensive .... may be worth thinking about selling 30/40 put spread or buying OTM call spread as alternatives ...

Screenshot of slingshot attached ....

Cheers
James
 

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Quote from newguy05:

[what do you guys think of the following play on dndn for may expiration

1) short 1x atm($40) straddle
2) long 1x otm strangle at 10 pt out ($50C, $30P)
3) long 1x otm 50C (load the wing on 1 side)

This is based off my assumption the stock will either not move much (short vega) or move higher after news ( long gamma on call side). If i am wrong, my loss is defined.
More...
The short answer is that if it doesn't move much, you make money. If it does, you don't.

While the risk profile is a bit different, I'd take a look at a calendar straddle. Buy the Aug 40, sell the May 40. If you're right and it goes nowhere, you'll own the Aug 40 straddle at a lower cost, with the potential for a big gain if it moves subsequently or the option of writing June's against it if you still think it's going nowhere.

Even if IV declines 1/3, you'll still have a better risk profile. The big difference is that you won't have the slingshot effect to the upside.
 
Quote from matador04:

Why don't you use back months?
More...
What's the advantage of back months? They offer a lower net credit. Or did you mean diagonalizing?
 
What you have is basically a butterfly spread, a neutral strategy for a credit. The additional long 50 call, a very bullish position, results in only reducing the credit and narrows the breakeven points up or down on the underlying for the neutral part of the strategy. Your own breakeven point for a dramatic up side of 54.65 requires a 36% plus move on the May options with a short fuse. The butterfly spread may prove profitable, the extra long call is most likely only a hindrance.
 
Quote from spindr0:

The short answer is that if it doesn't move much, you make money. If it does, you don't.

While the risk profile is a bit different, I'd take a look at a calendar straddle. Buy the Aug 40, sell the May 40. If you're right and it goes nowhere, you'll own the Aug 40 straddle at a lower cost, with the potential for a big gain if it moves subsequently or the option of writing June's against it if you still think it's going nowhere.

Even if IV declines 1/3, you'll still have a better risk profile. The big difference is that you won't have the slingshot effect to the upside.
More...

the calendar straddle you suggested is much less risk i think, i could even start by selling the apr atm straddle (slightly more risky), then go to may when it expires.

The only thing is i want the slingshot though, a 35%+ move to break even on most stock is lottery but this is pharma that's waiting on one of the biggest news announcement in the industry. If it does get approved, the stock may very likely gap 50-100% in a few days, i want to capture that move if it happens.

Is there a better way to play it than a sling shot? that will capture both no-move and gap move up, while put a floor on the gap down loss.
 
Quote from stoic:

What you have is basically a butterfly spread, a neutral strategy for a credit. The additional long 50 call, a very bullish position, results in only reducing the credit and narrows the breakeven points up or down on the underlying for the neutral part of the strategy. Your own breakeven point for a dramatic up side of 54.65 requires a 36% plus move on the May options with a short fuse. The butterfly spread may prove profitable, the extra long call is most likely only a hindrance.
More...

i understand exactly what you are saying and agree, but same as above this is a pharma stock waiting for big news that will likely come in may, a 50-100% gap up is quite possible.
 
Quote from newguy05:

The only thing is i want the slingshot though, a 35%+ move to break even on most stock is lottery but this is pharma that's waiting on one of the biggest news announcement in the industry. If it does get approved, the stock may very likely gap 50-100% in a few days, i want to capture that move if it happens.

Is there a better way to play it than a sling shot? that will capture both no-move and gap move up, while put a floor on the gap down loss.
More...
Everyone wants a position that costs very little, loses minimally if the UL drops, makes money from time decay if the UL goes nowhere and does very well if the UL gaps up. Would you like six pack abs and a super model as well? :)

Risk and reward generally go hand in hand. If you want less risk, you usualy have to give up some reward, etc. You can shift the risk profile but you're going to have to give up something here to get more there.
 
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