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Options Trade on BHP Billiton

LOS ANGELES ( Top Gun Options) -- Strategic mindset: The Top Gun Options Advanced Model Portfolio mindset is: market neutral to bearish with possibilities of surges in volatility.

Target: BHP Billiton Limited (BHP) trading at $61.66

Commit criteria: This is a bit of a riskier trade, and we purposefully made it fairly small. We also created this with more room to move down than up, since we see greater risks in that direction.

The implied volatility in BHP is quite high, creating a good trade opportunity for us, but we must be careful. The return from this trade is very good for its short length, but the risks are higher also. BHP implied volatility is overpriced relative to its forecast volatility of 5% over the trade period.

We are looking for possible price movement, but for it to stay within its $55 to $65 price range until the exit of this trade.

Tactic: Opening 10 BHP June 2012 Iron Condors (strikes 50/55/65/70 ) for a $0.88 credit

Tactical employment of Iron Condor:

  • Buying to open 10 BHP June $70 Calls
  • Selling to open 10 BHP June $65 Calls
  • Selling to open 10 BHP June $55 Puts
  • Buying to open 10 BHP June $50 Puts
  • Net credit: $88 per Iron Condor for a total of $880
  • Max gain: $880
  • Max risk: -$412 per Iron Condor for a total risk of -$4,120

Midcourse guidance: We will be watching for a price movement near the short strikes. As the short strikes are threatened we will adjust the Iron Condor as necessary.

We don't want trade expectancy dropping below 2%. Based on this we have two price targets at which we need to consider an adjustment: BHP trading below $55.42 and above $63.75 are triggers for adjustment.

Profitability target: We will wait for this Iron Condor to expire worthless, taking the $880 credit as profit.

Exit tactic: We will wait for this Iron Condor to expire worthless in the Top Gun Options Model Portfolio, adjusting as necessary. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Matthew "Whiz" Buckley is the Founder and CEO of Top Gun Options, an exclusive provider of options training and practical trading applications for options traders of all skill levels. He is also the founder of Strike Fighter Financial LLC, a business-consulting firm specializing in leadership development, risk management and strategic planning for Fortune 500 companies and related organizations. He's also a Managing Partner and Chief Financial Strategist at Wealth Creation Investing. Buckley flew the F/A-18 Hornet for the U.S. Navy. He's a graduate of TOPGUN, has close to 400 carrier landings and flew 44 combat sorties over southern Iraq. After leaving active duty, he served as a Managing Director at a Wall Street volatility arbitrage options firm and was a founder and the CEO of a financial media company. He is an internationally recognized speaker and combined his experiences in the military and corporate America in his first book "From Sea Level to C Level."

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