what do I pick? Diagnol spread ~ you sell one strike (otm), buy another (less otm). The less OTM strike is one month further out than the more OTM one. Your objective on this trade would be for SOX to reach, but not surpass, the first strike {so that, come the Options Expiration date of the front month, your short option is worthless while your long option is worth as much as it can be with the short option still being worthless).
So say you want SOX 420. Say you think it will not happen before August expiration though. Say you don't think SOX will be able to get past 430 {although will be close}. You could then:
For example, SELL the Aug 430p / BUY the Sep 440p
So hopefully come Aug you will buy back the Aug430p for nickels and now have a great discount on t he Sep440, which, if it hits your target of 420 by opEx, will be worth $20+/- some time premium.
Sounds good eh?
Right now you could get that trade for a credit. Meaning you would receive more from the sale of the August contract than you would have to use to purchase the September put.
Right now, the spread on that diagnol spread is -5.9 x -3.8
the mid point is about -4.85.
Thus for one contract on each leg of the spread, you would receive $485.
AND, this is a trade where you can still make much much more money. You could make more than 100% on the trade easily {think about it: if the August call expires worthless, you are holding the September call for LESS than free. You're getting PAID to hold it).
The PnL chart for the trade looks like this right now:
At the time of August OpEx, the PnL chart would look like this:
Thus by August OpEx, you want the SOX to settle AT 430. But you have lee-way after that for some time. Say the SOX drops off the planet before August OpEx, you're still gonna make a pretty penny.
After the August OpEx, your PnL chart looks just like a long put. Except there wouldn't really be a loss line for you as you've already received a credit on the trade.
The key to this trade is both sides of the spread are deep OTM. And that's why it looks so good if it does indeed make your targets.
Your max loss on the whole trade is $300. Not bad. When you can make $1400 by August OpEx.
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