say you thought things would at least stabilize and potentially reverse sharply and be up say 0-4% 1 week out, and maybe at a new high 3-6 months out. What structure would you use that would get a very favorable risk:reward of 1:5 or maybe even better? A bull put spread would take advantage of really high volatility, but has poor R:R. credit ratio backspread, OTM butterfly? Other?
would a bullish version of this OTM directional butterfly work equally as well as this? One bearish player positioning for further weakness in the EWJ initiated a put butterfly spread today. It looks like the trader purchased 13,600 puts at the April $9.0 strike for a premium of $0.28 each, sold 27,200 puts at the April $8.0 strike at a premium of $0.11 apiece, and purchased 13,600 puts at the lower April $7.0 strike for a premium of $0.05 a-pop. The net cost of the put âfly play amounts to $0.11 per contract, and positions the trader to make money should shares in the fund fall another 6.2% off todayâs low of $9.48 to breach the effective breakeven price of $8.89 by expiration next month. Maximum potential profits of $0.89 per contract pad the investorâs wallet if shares in the EWJ plunge 15.6% to settle at $8.00 at expiration. Shares in the fund have not traded below $9.00 since May of 2009.
By definition the 2STD OTM Long Call gives you the best R/R ratio. However, there is no static option construct that would give you what you would like to have. Only dynamic synthetics with super replicate abilities could be used to capture the current situation reliably.
?.....A bull-call-spread "structured" in a way where your short-strike is struck at-the-money or slightly-in-the-money from your upside objective and the long-strike is bought such that the spread's debit is less that 20%, (1 divide by 5)(risk "1" to make "5"), of the separation of the strike prices......I think.