After the helpful feedback recently, I was doing some follow up studying and decided to look at a possible trade - I would appreciate some feedback if someone has the time.
1. Symbol: F (FORD).
2. Looking at the daily chart, I am thinking there is a possible pullback after the large move away from the 20 MA and the fact theres been some movement away from the recent support zone that could be re-tested before continuing north.
3. The recent high was $10.66, and the closing price was $10.40, or a $.26 distance so far. This high could represent a new resistance level, pushing price down again after a subsequent re-test that may follow. If it isnt, price could then head up towards $10.8, or $0.14 away from the recent high, and $0.40 from the current close price.
4. The OCT 11 CALL costs $0.09 and has an IV of 25.11%. I could purchase 100 contracts for $900 ignoring commissions.
5. The OCT 9 PUT costs $.02, and I could buy another 100 for $200. This may be a little silly after thinking this through, but my thought was that if price pullsback harder, the the probability of the 9 PUT being in the money would increase and this its price would rise. The call purchase would lose value but I could at least cover some of that loss on the put. However I realize if the underlying price is 9 or above, then I lose the $200 as well as the call cost, the whole $1100.
6. The Delta on the OCT 11 Call is current 0.22. So a $1 move will see my option price move by .22. The IV for the option is 25.11%, which I am taking to mean a +/- move of 0.22*0.2511 = 0.055. I am also taking this to mean this is the daily change of the option at current conditions - is this correct?
7. My cost for the trade ignoring commissions is $900 for the call and $200 for the put.
8. To breakeven, I need my call to rise by 0.02 to 0.11.
9. The current delta tells me that at 0.22, a 1c move in the option price needs the following:
- 100c = 0.22, so 1c in underlying will cause option to move by 0.0022c (calculated from 0.22/100c).
- 1c move in option price requires 0.01/0.0022, or 4.54c move in the underlying. So I need roughly 9c appreciation in the underlying to see my call option move to $0.11, which is my breakeven.
This is as far as I have could go. The TOS software tells me the probability of the Call being OTM is 80% roughly, which I guess correlates with the delta (probability of ITM) of 0.22. What I am unsure about is the fact that a 9c move doesnt seem unreasonable. I dont know how to work out what the value of the put would be (probably zero). There is apparently 95% the put would be OTM. If I purchased the closer put (Oct 10 Put @ 0.13) I would need my call to rise to 0.22 (0.09+0.13) to breakeven, or 144.45%. With the original suggested put of Oct 9 Put @ 0.02, I only need a 22.2% increase in the call to breakeven. I cannot apprehend at this point whether I am just throwing $200 away. Would it make more sense to sell the OCT 14 CALL @ 0.02 which would drop my cost basis for the trade down to $700. Not sure.
when you're dealing with a low absolute cost of options it's dangerous to say "ignoring commissions" b/c those will def add up. unfortunately optionshouse got ride of their 9.99 for unlimited contracts a while ago b/c everyone took advantage of it.