Trade Idea: Defined Risk Options Setups to Short the DIAmondsWith the DIA at fairly long-term overhead resistance, I thought I'd set out how I'd potentially take a bearish assumption directional shot using a defined risk options setup where the max loss is known from the outset. There are several ways to go about this:
1. Short Call Vertical
Buy the September 15th 351 call and sell the September 15th 346 call, resulting in a five wide spread for a 2.70 ($270) credit. Max profit is realized on a finish below the short call strike at 346; max loss, on a finish above 351.
Metrics:
Max Loss: 2.30 ($230)
Max Profit: The width of the spread (5.00) minus the credit received (2.30) or 2.70 ($270).
Break Even: 348.70
Probability of Profit: 55%
ROC %: 117% at max; 58.7% at 50% max.
Delta/Theta: -12.03 delta, .79 theta
Variations:
1) Go farther out-of-the-money with your spread, giving yourself more room to be wrong, with the trade-off being a smaller credit received and a lower ROC %-age. Example: September 15th 356/361 short call vertical, 1.09 ($109) credit on buying power effect of 3.91 ($391) (which is also your max loss). 27.9% at 50% max; 13.9% at 50% max; -10.02 delta, 1.14 theta. Max loss is realized on a finish below the short option leg of the setup (i.e., 356).
2) Widen the at-the-money spread, but to not more than a risk one/make one setup. Example: September 15th 346/354 Short Call Vertical, 3.95 credit on buying power effect of 4.05 ($405) (which is your max loss). 97.5% ROC at max; 48.8% at 50% max. -19.54 delta, 1.42 theta. Here, you're risking 4.05 to make 3.95, which is about as close to a risk one/make one setup as you can get.
If you look at the delta metrics of each as an indicator of how bearish your assumption is, the out-of-the-money spread has the lowest of the bearish assumptions at -10.02 delta; the risk/one make one 8-wide 346/354, the greatest at -19.54. Generally speaking, the setup should match your assumption somewhat, so if you're presumably less confident of a retreat from this level, then you should probably go with the out-of-the money spread; more confident, with the wider, at-the-money spread.
2. Long Put Vertical
Buy the September 15th 349 put and sell the September 15th 343 put, resulting in a 6-wide spread for which you pay a 2.50 debit (which is your max loss). Max profit is realized on a finish below 343; max loss on a finish above 349.
Metrics:
Max Loss: 2.50 ($250)
Max Profit: 3.50 ($350)
Break Even: 346.50
Probability of Profit: 50%
ROC %-age: 140% at max; 70% at 50% max
Delta/Theta: -17.95/.72
Variations:
As with the short call vertical, you can naturally widen the spread, with my preference being to keep the ROC %-age metrics around a risk one to make one.
3. Long Put Diagonal
Buy the September 15th -90 delta 369 put and sell the +30 delta August 18th 339 for a 21.75 ($2175) debit, resulting in a 30-wide calendarized* spread.
Max Loss: 21.75 ($2175)
Max Profit: 8.25 ($825)
Break Even: 347.25
Probability of Profit: 54%
ROC %-age: 37.9% at max; 19.0% at 50% max.
Delta/Theta: -60.65/2.99
A couple of things stand out about this setup. First, look at the short delta; it's bigly at -60+. Second, look at the price tag; it's also bigly relative to the other setups. That being said, the max profit potential is also greater than the other setups, but would require a finish below the short leg at 369. It does, however, have one additional advantageous element, and that is its calendarization which allows you to roll out the short option leg for additional credit should the setup not work out immediately. This results in a reduction in cost basis for the setup, improves your break even and therefore your profit potential.
On a more practical level, I personally don't look to get max profit out of this type of setup. I look to take profit at 10% of what I put it on for and then move on. Here, that would be around $220 or so; given the setup's delta, that would require a move of around 4 handles or so to the downside, which wouldn't be much to ask given price action in the underlying.
4. Zebra**/Put Ratio Spread
Buy 2 x the September 15th -75 delta 375 puts (for a total of -150 delta) and sell 1 x the +50 delta put at the 345 for a 13.65 ($1365) debit. Max loss is realized on a finish above 375; max profit isn't defined.
Metrics:
Max Loss: 13.65 ($1365)
Max Profit: Undefined***
Break Even: 347.35
Probability of Profit: 53%
Delta/Theta: -101.19/-1.23
As with the long put diagonal, the short delta is bigly -- the biggest of all the setups at -100, so if the underlying moves down one handle, the setup will be in profit by 1.00 ($100). Conversely, if it moves 1.00 to the upside, it will be in the red by 1.00, at least at the outset, when its dynamic delta remains at -100.
Since this setup does not reach a "max," taking profit is somewhat subjective. As with the long put diagonal, I generally take profit at 10% of what I put it on for and move on. $136 in profit isn't particularly compelling here, so I could see looking to take profit on movement toward the most recent swing low at 337, which would result in 8 handles or so of -100 delta profit ($800). An added disadvantage to hanging out in this setup for too long for "moar" is that there is some degree of assignment risk if the short put goes deep in-the-money, particularly if it does that toward expiry.
5. High Probability of Touch Long Put
Buy the September 15th 342 Long Put for a 4.55 ($455) debit
Metrics:
Max Loss: 4.55 ($455)
Max Profit: Undefined
Probability of Profit: 32%
Break Even: 337.45
Delta/Theta: -40.72/-4.52
I generally don't do standalone longs for a number of reasons I won't get into here, but thought I'd set out some kind of common sense approach that utilizes one of the metrics most traders that seem inclined to use this approach don't discuss (or aren't aware of) and its "Probability of Touch" -- the likelihood that price will "touch" the strike at some point during the life of the contract.
The general rule of thumb is that POT is about 2 times the delta of the strike. Given the fact that this is a -40 delta strike, the POT is around 80%, implying that the options market is pricing in about an 80% probability that price will touch the 342 strike at some point during the life of the contract.
* -- It's "calendarized" because one leg is in a different expiry than the other, as compared to the short call and long put verticals, above, where both legs are in the same expiry.
** -- A "Zebra" is a "zero extrinsic back ratio" spread with the short option legs paying for all of the extrinsic in the longs, resulting in an at-the-money break even.
*** -- It's technically 347.35 ($34,735), but that assumes DIA goes to zero, which (just taking a stab here) probably isn't going to happen.
Longputvertical
Closed (IRA): /GE December '22 98.50/98.75 Long Put Vertical... for a $215 debit.
Comments: I opened these for a $25/contract debit wayyy back in February of 2021 (See Post Below) when /GE was trading above 99.75, betting that -- at some point -- Eurodollar futures would return to their prepandemic levels and gave the play oodles of time to work out.
Closed them on Friday for $210/contract with 268 days to go, with /GE finishing the day at 98.3950.
OPENING (LATE POST): /GE DECEMBER 19TH '22 98.50/98/75 LPV... (long put vertical) for a .25/contract debit.
Notes: Here a bearish assumption bet that 3 month Libor returns to pre-pandemic levels by the end of 2022 (i.e., below 98.50). Risking .25 ($25) to make 6.00 ($600). Obviously, an extremely long duration trade, but with a 24:1 reward:risk ratio.
TRADE IDEA: /6E JANUARY 8TH 1.195/1.2 LONG PUT VERTICALMetrics:
Max Profit: 337.50
Max Loss: 287.50
Break Even: 1.1977
Notes: A bearish assumption directional shot at resistance. Alternatively, FXE January 15th 111/113 long put vertical, 1.05 max profit, .95 debit/max loss, break even 112.05 vs. 112.13 spot (although it's trading above that pre-market).
OPENING: /ES OCTOBER 16TH 3550/3560 LONG PUT VERTICALMetrics:
Max Loss: $250
Max Profit: $250
Break Even: 3555
Notes: In a fit of boredom, putting on a small risk one to make one long put vertical here with max profit realized on a finish below 3550. This seems counterintuitive, since the short put is monied, and you generally don't get a risk one/make one spread without straddling the strikes across the money. In this particular case, it's due to skew. In any event, will look to start to take profit at 25% max.
OPENING: TLT APRIL 17TH 149/153 LONG PUT VERTICAL... for a 2.13/contract debit.
Metrics:
Max Profit: 1.87
Max Loss: 2.13
Break Even: 150.87
Notes: With yield of the 10-year T-note at multi-year lows and TLT at multi-year highs, taking a small directional shot with nearly risk one to make one metrics.
TRADE IDEA: XLF FEBRUARY 21ST 30/32 LONG PUT VERTICALWith the financials at a multi-year double top, a bet that financials announcing next week will disappoint in the aggregate in this easy/easing rate environment.
Metrics:
Max Profit: $96/contract
Max Loss: $104/contract (which is what you'd pay to put this on).
Break Even: 30.96 versus 30.69 spot
Notes: Max profit is realized on a finish below the short strike at 30; anything below the break even of 30.96 is a winner; and max loss is realized on a finish above the long at 32. A basic risk one to make one, which is what I like to see out of these directional shots.
TRADE IDEA: RTY DEC 20TH 1610/1620 LONG PUT VERTICALWith the small caps at long-term range highs and implied volatility at the low end of its 52-week range (rank/implied 10/15.8), it's potentially debit spread time.
Pictured here is an /RTY 1610/1620 long put vertical with risk one to make one metrics ($250 max profit/$250 max loss) with a 1615 break even. Unfortunately, markets are wide in RTY, so some price discovery may be required if you're going to go that route. Alternatively, look to put on a similar play in RUT at NY open ... .
OPENING: GLD SEPT 20TH 128/130 LONG PUT VERTICAL... for a .21/contract debit. (Late Post)
Metrics:
Max Profit: $179/contract
Max Loss: $21/contract
Break Even: 129.79
Delta/Theta: -6.26/-.43
Notes: Put this on in the closing minutes of Friday's session. Looking for a move back to the short-term range lows ... .
What goes up... I think LLY is ready for a short term pullback. It's just about as high as it's ever been.
It missed earnings estimates
Recent news includes selling a half-priced version of insulan. Great news I suppose and it did not push the stock higher. So the energy behind this stock maybe is at it's peak.
Trading today well above it's 21, 50, 200 MAs
RSI(14) is 71
Other Stuff:
The "consensus" price target (on the nasdaq website) is 123...
There are 7 "analyst firms making recommendations". 7 are strong buy and 6 are hold. I guess one of the 6 "hold" recommendations could be upgraded, which would probably send the stock up... but there's no adjustment up from Strong Buy so at least half of that is covered.
It missed earnings forecast by just a little bit in early Feb.
Fwiw Implied volatility is 25%
I googled "charts to tell me when a run has peaked" and it kinda blew my mind.
Possible study targets:
Head and Shoulders
Triple top
The problem is... at every top, it goes a little higher. Yeesh.
My bet: April 18 130/125 Put Spread for $2.50
Max profit ($250) if the underlying is below 125 on April 18.
TRADE IDEA: SPY OCT 19TH 233/235 LONG PUT VERTICALRisking one to make one at all time highs in a low volatility environment ... .
Metrics:
Probability of Profit: 52%
Max Profit: 1.01 ($101)/contract
Max Loss/Buying Power Effect: .99 ($99)/contract
Break Even: 294.01
Theta: .10
Delta: -10.1
Notes: If it fills, it fills ... . Will look to take profit at 50% max.
OPENING: VXX MARCH 2ND 25.5/28.5 LONG PUT VERTICAL... for a 2.23/contract debit.
Max Profit: $77/contract
Max Loss: $223/contract
Break Even: 26.27
Notes: My standard Thursday or Friday weekly expiry play. You can probably still get a fill in the neighborhood of 2.25 (or .75 credit for a short call vert) if it doesn't move much come Friday open. Will look to take it off for >15% of what I put it on for ... .
OPENING: VXX FEB 2ND 27.5/30.5 LONG PUT VERTICAL... for a 2.25/contract debit.
Metrics:
Max Profit: $75/contract
Max Loss: $225/contract
ROC%: 33.3% (at max profit)
Break Even: 28.25
Notes: I've been sticking these three-wides out there for fills at 2.25, but in any event don't want to pay any more than 2.30 (30% ROC). This one filled at 11 minutes after open, so I didn't have to fiddle. I'll rotate back into UVXY after it splits ... .
OPENING: VIX APRIL 18TH 14/17 LONG PUT VERTICAL... for a 2.24 debit.
Metrics:
Probability of Profit: 89%
Max Profit: $76/contract
Max Loss: $224/contract
Break Even: 14.76
Metrics: Here's the live trade for the VXMT-guided, medium term volatility trade referenced in the post below. At the time of the trade, VXMT was at 14.46, which is approximately the price at which the April futures contract is trading (14.68 at the time of this post). With 126 days until expiration, not a trade for the impatient or for those looking for instant gratification ... . These generally come in at 50% max about half way through, however (in this case, about 63 days).