How to Use S&P 500 Options to Profit From the Passage of Time
The chart below shows the price range in the S&P 500 which will be profitable if both S&P 500 iron condor spreads are held to expiration.
If both S&P 500 spreads are held to expiration, the profitability range for both trades held simultaneously is $1,820 to $2,020. The probabilities are quite favorable that one if not both trades will be profitable at the August and September expirations.
The combined strategy offers a probability of close to 80% to make a positive return. Based on maximum possible risk, the typical return is between 10% and 15%, depending on implied volatility changes during the holding period of the trade. At first glance, many traders write this strategy off as a poor strategy based on risk vs. reward.Read More: Has the Auto Industry Peaked? But what other strategy offers nearly a 10% to 15% return on maximum risk with a near 80% probability of success at the time of entry? When paired with other directional trades, having multiple high-probability iron condor spreads on the books at the same time builds a high level of positive theta that helps support consistent portfolio profits. So far, the recently launched Technical Traders' option service is boasting two closed trades thus far. Both trades that have been closed were quite profitable. The first winning trade was in Facebook (FB), which was directional biased to the upside. A call diagonal spread was the trade structure chosen. The trade had a maximum risk of $493 per spread and produced a gross gain of $111, or 22.51% per spread. The other big winner was a CurrencyShares Euro Trust (FXE) put butterfly spread, which was designed to profit partially from the passage of time and from lower prices. The trade was entered with a maximum risk of $141 per spread and produced a gross gain of $53, or 37.59% per spread. Read More: Time's Up! Alibaba or Softbank Should Buy Yahoo! Now Inquiring minds might ask how I accomplish this task. Overall, the new option service is off to a great start and currently has several additional trades which are profitable at this time. For more information, check out our new cheaper, upgraded options service. At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates FACEBOOK INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate FACEBOOK INC (FB) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and impressive record of earnings per share growth. However, as a counter to these strengths, we find that the stock itself is trading at a premium valuation."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- FB's very impressive revenue growth greatly exceeded the industry average of 11.4%. Since the same quarter one year prior, revenues leaped by 60.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
- FB's debt-to-equity ratio is very low at 0.02 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 12.48, which clearly demonstrates the ability to cover short-term cash needs.
- Net operating cash flow has slightly increased to $1,341.00 million or 1.43% when compared to the same quarter last year. Despite an increase in cash flow, FACEBOOK INC's cash flow growth rate is still lower than the industry average growth rate of 17.57%.
- Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. When compared to other companies in the Internet Software & Services industry and the overall market, FACEBOOK INC's return on equity is below that of both the industry average and the S&P 500.
- You can view the full analysis from the report here: FB Ratings Report
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