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[david_3011]

ELN Play Strategy 1

This is one way that I would formulate my game plan. I would like to propose this just for demo purpose. For the disclosure, I will not participate in this transaction as I’ve spread a little too thin lately trying to take full advantage of the current market condition before it changes again. I’ll be posting this on my Hub as well for others who have bookmarked my Hub.

Every trade is different. One size does NOT fit all. The problem arises when we try to take the easy route of finding the panacea. It simply doesn’t work that way. Except for some basic plays that I’m very comfortable with, every trade puts my “little gray cells” – as per my favorite Agatha Christies’ detective Hercules Poirot – to work.

Here’s one way to play ELN, if you believe the price is going to move up to cover the gap within a month. Of the many varieties, one simpler ways is to put on a long straddle. Let’s put in the play first and then we’ll explain the risk/rewards. Assuming we’re investing $10,000 in this trade.

buy 45 May $5 Call @ $0.30 and
buy 45 May $5 Put @ $1.90
For a total investment of $9,900.

Here’s what will happen if the underlying stock ELN goes to:
Stock ---- Profit (Loss)
$0.00 ---- $12,600
$2.50 ---- $ 1,350
$2.80 ---- $ 0
$5.00 ----($ 9,900)
$7.20 ---- $ 0
$10.00 --- $12,600
$12.50 --- $23,850
$15.00 --- $35,100
$17.50 --- $46,350

(Can someone teach me how to put up tables?)

This is how it works.
Upside breakeven: $5.00 Straddle Strike + $2.20 ($0.30 + $1.90) Cost of Straddle = $7.20

Downside breakeven: $5.00 - $2.20 = $2.80

Your position will show a profit as long as ELN moves above $7.20 or below $2.80. Your maximum loss will be if ELN stays at $5.00 strike by May option expiration when both options expire worthless. And that’s the greatest risk area.

And if you’re a student of the market, you’d be able to come up with other variations of game plans. What I have to remember though is not to look at how much I could gain from the trade even before I make the trade. I wouldn’t be able to see the facts as I’m supposed to see them.

Whew!!!

David
#board-3693