My Options Play
- Thread starter Multioption
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Ya know, i didn't. HUM reports next week(mon.). Volume is too low and spreads are too great to get fancy in HUM options(not that i can get fancy with derivatives yet
) It seems next week will be a good time to trade HUM.VZ has an interesting chart. Their earnings should go up is my feel but i haven't looked over their balance sheet or the earnings. Thanks. I have been studying my arse off
.Let's do a quick calculation:
Wed 10/26 after closing I looked at AAPL:
http://www.elitetrader.com/vb/showthread.php?s=&postid=879941#post879941
My assessment was to enter short at closing (AAPL at $57.03) with a stop loss at $60 and an exit target at $53.7 in 1-2 weeks. IV being relatively low 35-36% I decided to buy the Nov 60 put, QAAWL.
Let's compare this with the Nov 65 put, QAAWM (next strike deeper ITM).
To size my position I assume an account of $100k, and I'm willing to risk 1% for this position $1,000.
Quotes as of 10/26:
- QAAWL 3.7 / 3.9
- QAAWM 8 / 8.2
- AAPL at $60
- IV 25% drop
- 2 weeks from opening
- a drop of $2.8 for QAAWL
- a drop of $3 for QAAWM
- 3.53 contracts QAAWL
- or 3.24 contracts QAAWM
I attached the graph of the 3.53 QAAWL contracts, and the graph of the difference 3.53 QAAWL - 3.24 QAAWM contracts (a backspread with a ratio very close to 1, almost a bull put spread).
What do I read here?
- QAAWL position will make $800 if AAPL drops to $53.7 (green line), and lose $1,000 if stopped at $60 12 days before expiration (red line)
- QAAWM position will make $150 more than QAAWL if AAPL drops to $53.7 12 days before expiration, and up to $200 more if AAPL will be about $56 at that time. If stopped at $60 QAAWL will outperform QAAWM with $25 to $125.
- QAAWL ties up $1,377 (ask $3.9), while QAAWM (ask $8.2) ties up about twice as much $2,657; this represents also the absoulte maximum risk when AAPL gaps up through my stop loss, and I lose my whole investment.
- QAAWM offers up to 25% higher gain, with an investment 100% higher.
You may want to go after the up to 25% higher absolute return (for the same $1,000 stop loss), if so you should open the QAAWM position.
Slippage doesn't seem a factor here.
Also, even deeper in the money puts don't offer any advantage, and they tie more capital and increase the "black swan" risk.
Comments? Opinions?
That sums it up!
Interesting analysis cnms2. If you are inclined to trade AAPL you may want to decrease your time frame until there is a price breach in either direction(54 or 57.70). AAPL's price uptrend has a rather noticeable testing pattern here--we are in the process of testing the right shoulder(daily) which isn't going that great(lol). I can see why you are eager to open the short but it does have room into 57 here. Just some thoughts.
For myself, E.T. is mostly entertainment. However, there are a couple here to learn from.
I have followed this thread (again ignoring a couple here) and can say it is an honest attempt to post trades and other traders are giving other perspectives of the same trade without harsh ridicule and forcing one's opinion.
Good job here, guys. Continue to keep it clean.
Good eye on VZ ice with shades on too.
VZ approaching completion of price crater as aforementioned. There is the gap in price(31.80-32.20) that i'm certain is driving some of this demand. As far as my trading/analysis goes this trade is over--all that is left is pulp, no juice(ST). I'd just as soon open a trade now and target 31 for quick take then see if price breaches 31 to add into 30.50. I hope no one minds.
VZ approaching completion of price crater as aforementioned. There is the gap in price(31.80-32.20) that i'm certain is driving some of this demand. As far as my trading/analysis goes this trade is over--all that is left is pulp, no juice(ST). I'd just as soon open a trade now and target 31 for quick take then see if price breaches 31 to add into 30.50. I hope no one minds.
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