Friday, March 23, 2012

Options Action trade on $BAC 3/23/2012

mar23,2012 Options Action show Brian layed out the following Risk Reversal trade for BAC:

Sell the May 9Put for about .40 (credit)
Buy the May10call for about .55 (debit)
Total for a one lot is a .15 debit ($15)

As usual the comments of "you might be put the stock" get thrown out there. Ive posted this previously, You will be "put the stock" at OPEX, not sooner unless it plummets. so close out the puts portion if it looks like that will happen. Also, they didnt mention that for every one-lot of this you need to have $900 in margin/buying power which is to buy the stock at $9 (because of that put you are selling).. so a 10lot costs will require $9000 in margin for as long as you hold those puts.

Brian emphasized that any moves about $10 is all profit. Mike mentioned that if stock moves up you can buy back the put and then "spread it out" which means to sell a higher strike call like the may 11 or 12.. All true. For this spread to be profitable at opex the stock needs to be at $10.15 or higher.

I like risk reversals since they are a way to commit a low amount of capital to the trade. but here is a suggestion on how i would do it a bit differently. I would initiate this as a "call spread risk reversal".. as in sell that higher strike call now. looking at option prices at closing the:
   May 11call is going for about .25
   May 12call is going for about .13

I would go with the may12 strike and my trade would look like this:

Sell the May 9Put for about .40 (credit)
Buy the May10call for about .55 (debit)
Sell the May 12call for about .13 (credit)
Total for a one lot is a .02 debit ($2 debit)

so for a 10lot i will pay $20 buckst. still have to have the $9000 in buying power set aside. My gain is capped at 12 because of the may12 calls im selling. Max profit is $2000 on the trade, max loss is the 20bucks from entry. If it closes below$9 your (Brians) thesis was they wanted to own it anyway. so you took a shot at $2000 gain for only $20. this is an excellant trade if youve had that buying power set aside waiting to get a position on BAC

will keep track of this trade to see how it did at opex.