Attempt at putting a trade together

Discussion in 'Options' started by aijourneyman, Sep 22, 2012.

  1. Hi,

    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.

    Is this a whole load of twaddle?


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  2. Too much in there to think about.
    You may be over analyzing the details of the trade.
    Or perhaps just sharing too many thoughts at once.
  3. 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.