K,
How would you have done it? What will be your choice and why?
Supposing V has an equal chance of moving up or down,
a) which of the 2 options would you choose to establish and why?
b) you are indifferent as to which option to choose why?
c) establish both and why?
kennynah wrote:TLT - iShares Trust Barclay's 20 Plus Yr Treasury
Remember that Option Trading is no more different than stock trading, in that one needs to first formulate an trade opinion, as part of an overall trading plan.
In this example, using TA, I see a possible bullish setup at this juncture. Obviously, one can include FA into consideration or use both TA and FA to decide if TLT will move up, down or sideways in the next 3 weeks.
As my trade opinion is that TLT will move higher than current price, I need to adopt appropriate Option Strategies that can offer an acceptable potential profits for some known associated risks of this position.
Note that Historical Volatility for TLT is now ~13%. It is at the low end of its HV. Option chain of Dec09 TLT also shows a similar Implied Volatility.
This is one possible setup employing ONE contract size :
Long TLT Dec 96 Call and pay a premium of $1.25 (known risk).
Short TLT Dec 96/94 Put and receive a premium of $0.67.
This entire position requires a capital outlay of $58 ($125 - $67) + commissions + $133 ($200 - $67) of margin requirement.
The maximum loss of this trade = $258 ($58 paid for this position + maximum loss of the $2 wide Short Put spread)
The maximum profit is unlimited !
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