Almost Risk Free Trade

will this strategy work well??

did this trade last week.
When QQQQ is at 48.00 (yesterday it is 48.80 also)
I Sell Sept 46.00 Put buy a Mar 08 39.00 Put (done with a $3 credit to cover commission so free at the moment this trade is done)
I sell a Sept 50 Call buy a Mar 08 57 Call (done with a $3 credit to cover commission so free at the moment this trade is done)
Max risk in sept $700 if QQQQ hit above 57 or below 39 and I did not do adjustment

The reason for the buy in mar 08 call and put is a protective wing. So I am hoping that sept qqqq stay within 46 to 50 that way I do not make any money in sept. From Oct onwards my protector wings is there so I can just sell far call and put and collect premium until march 08.

Let concentrate on put side the call side is the same
Now what happen if QQQQ drop to 46 after I sold my Sept 46 put. Buy back the put at a loss and sell 45 oct put (it should give a breakeven or small credit). QQQQ drop to 45 in the next 2 days. Buy back oct 45 put for a loss and sell 44 or 43 nov put (it should give a breakeven or small credit.) by the time u roll until feb 08. Which mean the market keep going down and down. your mar 08 39 put will increase in value. If it keep going down your put will be in breakeven stage and you still got a free 57 mar 08 call for you to play with.

QQQQ might not have jan 08 or feb 08 so fast. But again QQQQ might not even drop to 45 in sept.


The only problem is when QQQQ gap up or down more than $2 - $3 but how often does that happen? Probably in oct 1987 if QQQQ has been traded back then.

So is this really a almost risk free trade?

 

Is the juice worth the squeeze?

 

Not quite. Your max risk, as you said, is the difference between strikes (7 points) minus the credit you received (6), iow 1 point. You basically have a calendarised iron condor (short front month strangle, long back month strangle). You can roll them as you mentioned but your risk will then change - it either gets better or worse depending on your rolls. If you do no adjusting then your max risk remains the same (1 point) and a max reward of at least 6 (if qqqq expires between your short strikes). It's a very good risk to reward ratio.
db

 

yes as mention the max risk is if I do not do adjustment.

Bearing in mind that QQQQ is a index ETF (nasdaq)


The illustration here is for the put side (call side will be the same)

If QQQQ drop to 46 (close to it). Buy back the Sept 46 put and Sell Oct 45 Put. No Loss here and possibly a little credit. Along the weeks if QQQQ drop to close to 45. Buy back the Oct 45 put and Sell Nov 44 Put. If QQQQ keep dropping you will keep rolling no loss yet. All this while the call is making money since QQQQ is dropping. If QQQQ is going up then roll the call side and the put side will make money.

The only time it loss money is when QQQQ gap down below 39 or gap up above 57 in the example quoted.

Again since this is a index ETF how likely is for QQQQ to gap up or down $7. Let assume that QQQQ will not gap that much. Yes anything can happen but let assume here that QQQQ do not gap.

Is this a good strategy?

 

Every time you roll your short put down you increase your risk and reduce your potential max profit - the amount of increased risk depends on the amount of rolling. It is not a risk free trade and adjusting a losing position will NOT give you a better risk/reward no matter how much you want it.
db

 

hi

care to explain more on this??

Everytime I roll the risk is reduce on the put side. Everytime a roll there is no debit involved and possibly a credit. Only the duration is drag 1 month. When you roll to Feb 08 40 put. If QQQQ drop near to 40 there is no need to roll anymore. Closing the Feb 08 40 put and close the mar 08 39 put (since it is now at 40) Again there is no loss here. And all this while the call side is collecting money.

I do not understand the increase of risk?

Can you explain?

 

When he said "$3 credit"...I think he really means .03 credit.

 

I don't think that the Q's need to gap down 7 points for you to be in trouble. For example, if there's a gap down beyond your short put of only, say, 3 points, you won't be able to roll down for a credit or breakeven...I would think it would cost you money. But overall, yes, basically your main risk in this strategy is a loss due to a quick sharp move in one direction (gamma short).

 

yes that is what I am referring to yes it don't have to gap down $7 but if it gap more than $7 that is the max I loss that is why a protective wing is in place. That is why QQQQ is pick as it is index ETF and it don't gap that much (not saying that it will not gap) but it is more prone to news and earnings.

But other that gapping is there any other area or concern I should take note of?


I am referring to 0.3 credit which is why in the 1st month I do not make money.

 

?
Your credit is now $0.3? This changes a few things. Your risk now is $7-$0.3=$6.70.
Iow you're risking $6.70 to make at least $0.30. High probability trade but also high risk. When you roll your put down and out (as discussed previously) you may not necessarily take in a credit since the cost of your roll will depend on volatility and change in delta, iow you may have to pay a debit to roll which then gives you a worse profit albeit you reduce your max risk. The exact effect will depend on the cost of the roll. In summary you're risking ~$670 to make $117.
db