Preview for XOM/Dow convergence trade using EOD numbers...
Looking for 1/2 the overperformance of XOM vs Dow to be given back. Targets look like
Scenario XOM DIA
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1. XOM -20%, Dow flat 60->48 110
2. Both converge 10% 60->54 110->122
3. XOM flat, Dow +20% 60 110->133
Straight shot:
DIA Sep06 120C @ 0.95
XOM Oct06 55P @ 1.80 (x2)
Max loss is the premiums (1.80*2 + 0.95) -> 4.55. It gets tagged if *both* XOM ends above 55 and Dow below 12,000.
By scenario:
1. (55-48)*2 - 4.55 = +9.45
2. (55-54)*2 + (122-120) - 4.55 = -0.55
3. (133-120) - 4.55 = +8.45
Alternately, use a spread for the XOM position.
DIA Sep06 120C @ 0.95
XOM Oct06 55P/50P @ (1.80 - 0.75) = 1.05 (x2)
Max loss now 3.05, scenarios 1-3 drop to +6.95, +0.95 and +9.95.
Using ATMs max loss is the premiums, which are (3.60*2 + 5.00) -> 12.20.
1. (60-48)*2 - 12.20 = +11.80
2. (60-54)*2 + (122-110) - 12.20 = +10.80
3. (133-110) - 12.20 = +10.80
