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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.
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