AI
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| Posts | 3641 |
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| Alias Born | 09/21/2009 |
Wednesday, December 29, 2010 8:29:22 AM
The major differences between entering the Spread and entering the strangle can be summarized:
Trade 1 - 24 contracts Sell RIMM 55.00 P / BUY RIMM 50.00 P
Trade 2 - 8 contracts Sell RIMM 62.50 C / Sell RIMM 55.00 P
Trade 1 is a PUT Credit spread and Trade 2 is a short strangle. Both trades require approximately the same Margin requirements...roughly $10,000. Both Trades will expire on January 22nd, 2011.
Trade 1 gives me a credit of $56 / contract and Trade 2 gives me a credit of $116 per contract. Thus, Trade 1 gives me proceeds of $1344 in my account and Trade 2 gives me $928...both working on the same Margin.
Trade 1 has no upside (long) exposure, since I am not selling out of the money Calls...so the risk is void on the upside. Whereas, Trade 2 has upside risk. If RIMM goes over $63.66 (Strike + Premium)...ie Breakeven....then I am losing money on the trade.
Trade 1 and 2 both have a low end Strike at $55.00...but Breakeven is different for both trades. Breakeven on Trade 1 is $54.44 and Breakeven on Trade 2 is $53.84. Also, since I am trading more contracts in Trade 1...not only does it carry a riskier breakeven, but the loss exposure is greater if it carries through this breakeven point by a 3:1 ratio. (ie 24 contracts vs. 8 contracts).
So, Trade 1 gives me a greater profit for the month by $416 or 43% more than Trade 2. It also offers me maximum ~13.4% return on my Margin for the month, whereas trade 2 only offers me maximum 9.28% (given $10,000 margin requirement). Trade 1 has no upside risk also...however, it carries greater downside risk. That must me considered.
As I analyzed the trading options, I felt like utilizing the PUT Credit spread and its higher maximum return was worth the gamble of the riskier breakeven point. I really don't see RIMM hitting $55.00 by January 22nd, let alone either breakeven point. I would be prepared to exit either of these trades if the market quickly went against me.
Trade 1
Trade 2
*Disclaimer - These margin requirements are from Schwab. Check your individual brokers for margin requirement calculations. They can vary.
Trade 1 - 24 contracts Sell RIMM 55.00 P / BUY RIMM 50.00 P
Trade 2 - 8 contracts Sell RIMM 62.50 C / Sell RIMM 55.00 P
Trade 1 is a PUT Credit spread and Trade 2 is a short strangle. Both trades require approximately the same Margin requirements...roughly $10,000. Both Trades will expire on January 22nd, 2011.
Trade 1 gives me a credit of $56 / contract and Trade 2 gives me a credit of $116 per contract. Thus, Trade 1 gives me proceeds of $1344 in my account and Trade 2 gives me $928...both working on the same Margin.
Trade 1 has no upside (long) exposure, since I am not selling out of the money Calls...so the risk is void on the upside. Whereas, Trade 2 has upside risk. If RIMM goes over $63.66 (Strike + Premium)...ie Breakeven....then I am losing money on the trade.
Trade 1 and 2 both have a low end Strike at $55.00...but Breakeven is different for both trades. Breakeven on Trade 1 is $54.44 and Breakeven on Trade 2 is $53.84. Also, since I am trading more contracts in Trade 1...not only does it carry a riskier breakeven, but the loss exposure is greater if it carries through this breakeven point by a 3:1 ratio. (ie 24 contracts vs. 8 contracts).
So, Trade 1 gives me a greater profit for the month by $416 or 43% more than Trade 2. It also offers me maximum ~13.4% return on my Margin for the month, whereas trade 2 only offers me maximum 9.28% (given $10,000 margin requirement). Trade 1 has no upside risk also...however, it carries greater downside risk. That must me considered.
As I analyzed the trading options, I felt like utilizing the PUT Credit spread and its higher maximum return was worth the gamble of the riskier breakeven point. I really don't see RIMM hitting $55.00 by January 22nd, let alone either breakeven point. I would be prepared to exit either of these trades if the market quickly went against me.
Trade 1
Trade 2
*Disclaimer - These margin requirements are from Schwab. Check your individual brokers for margin requirement calculations. They can vary.
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