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
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