Trade: IBM currently at $153.40 Sell 1 IBM July 28 Expiration 150 Put at $2.00 (Short Put is 34 Delta and IV 22)
Analysis: Stock has been in a range over the last 12 months of 147.79 and 182.79. By selling the 150 Put at $2, you are committing to buy the stock at expiration at $148, if the stock is under $150.
You would be buying the stock at about the lows over the last 12 months. Because IBM Earnings are coming during the week of July 17, we get a little more premium than usual for selling a 21 Day Put that is about 3 ½ dollars out-of-the money.
The 34 Delta of the short put simply means that there is only a 34% probability we will be below $150 in IBM at expiration. What if you don’t want to buy the stock at expiration under $150 because of the big capital outlay of owning the stock?
Then I would just have an order in to buy the put back for $ 4 ½ if IBM has big down move. Since my credit is $2, I would be trying to limit my loss to not much more than I would of made.
Sell the Put
If I sell the put for $2 and IBM doesn’t go under $150 at expiration, I keep the entire credit. If IBM declines and I get out of the put at $4 ½, I limit my loss to 4 ½ minus my initial credit of $2 or $2 ½, not much more than my potential gain. That’s what we call Risk Management.
With the volatility once again in a lower range I like the success possibilities of an SPX weekly calendar today. I am looking at the trade below:
Sell 1 SPX June 2nd 2395 put
Buy 1 SPX Jun 16 2395 put
Debit for spread is approx. $9.00 with SPX trading at 2395
Total cost per spread at this level would be $900 plus commissions. Looking to close trade at a 10% gain or 10% loss. If you get filled at $9.00 immediately place good to cancel order to sell at a profit at $10.00. Close trade at a loss if you are down $100 on the spread.
With SPX currently at $2393, about 12 points from the all time highs, I am looking at a Call Credit Spread. I am looking at a 24 day trade in the June 16 expiration. Sell 1 2430 Call and Buy 1 2440 Call for an $1.90 Credit. Just filled this trade live at 11:35 am central time with SPX at 2393.
The Delta of the short call is 20, that means there is only a 20% probability that SPX will finish over the short strike of 2430 in 24 Days. The margin or risk on this trade is $810.
I am looking at making around 10% or around $80 on my risk capital of $810 for every 1 contract. I will have an order in to buy back the credit spread at $1.10 Debit as a profit target.
If SPX continues up, I will have an order in to buy back the spread at 2 times my profit target of $80. So I will buy the credit spread back for a loss if the credit goes from the initial $1.90 credit to $1.90 plus $1.60 or $3.50.
Always have a Plan before you start each trade! The position Greeks of the Trade for every 1 contract: Deltas -6.66 Gamma -.14 Theta 6.22 Vega -40.42.