Google: Combat Options Trading
NEW YORK ( TheStreet ) -- Even with the peacefulness of Christmas approaching, the combat of trading options continues. Money never takes a rest (didn't want to infringe there...).
Let's take a look at a new position we've added to our model portfolio at
Fox3 Options
. We share these to educate you on how we take a disciplined approach to trading options.
Strategic mindset:
Semi-Bullish with a clear top on
(GOOG) - Get Report
, bearish on volatility with an upside move.
Fox3 Options
has had some great trades with GOOG in the past couple of months (all "good kills" or winners) and it's time for another potential winner. This broken wing butterfly offers us upside potential, with zero downside risk, part of our guiding precepts at
Fox3 Options
: Discipline, Risk Management, and Superior Execution.
We are using the technical resistance of about $630 in the stock to create an upside target. The breakeven in the tactic we'll employ is about $3.00 above that level.
Important safety tip -- we are making sure to execute this tactic for a credit. We need to make sure all the switches are in the right position before squeezing the trigger.
Commit Criteria:
We have a moderately bullish sentiment on GOOG given its huge recent run-up and seemingly tired technical's up at this altitude. We believe that the broken wing call butterfly would be appropriate with the center strike near the target we have for GOOG in January, with the upside breakeven above GOOG's two-year high.
Tactic: Long Broken Wing Call Butterfly (Credit)
The tactic that we're using for this trade is a Long Broken Wing Call Butterfly. In this instance, we decided to do the trade earlier this week for a credit of about $3.10. This tactic prefers a moderate move to the upside to the center strike of 620 to make max profit (an additional $10). We would prefer the stock to move either slowly up to 620 and stay there or simply stay anywhere below that level by January expiration. We also want volatility to decrease as we are short vega. If GOOG drops, we will simply retain our credit.
Tactical Employment:
Buy to open 5 January 610 calls
Sell to open 10 January 620 calls
Buy to open 5 January 650 calls
As a spread
For a net credit of $2.50 or more
Here's how the tactic is employed: we'll sell the broken wing butterfly call spread by buying 5 of the January 610 and 650 calls and selling 10 of the January 620 calls, simultaneously as a spread for a net credit of $2.50 or higher. If the stock moves lower, then we will simply retain our $2.50, which is a nice return on our risk. If GOOG moves higher, we can make an additional $10 in our trade.
Our goal is just to have GOOG move to 620 and stay there by January expiration.
Mid-course guidance:
We will monitor the trade for changes in price and this trade is nice because it shouldn't decrease in value quickly unless the GOOG begins to make a dramatic move higher immediately. Anything is possible obviously, but our radar picture isn't showing too much traffic around the target. If the stock begins to creep higher and looks like it may exceed the 620 line, we may consider an exit, hopefully for a profit at that point in time. If GOOG moves lower we may maintain the trade until expiration, where all calls would expire worthless.
Eject Criteria:
We must monitor the spread at least once a day and watch for movements. We should not see volatile draw downs unless GOOG screams past 620. If the spread moves to a debit of $2.00, we will exit the trade.
We will also close trade if commit criteria changes.
Profit Goal:
Preferably, we would like to get close to the max profit out of this trade and this will generally not occur until expiration with GOOG at 620. If we can close the trade for an additional credit before expiration, we may do so, but this is more a wait and see trade. The last week of expiration will be the most advantageous time to exit in all likelihood so we'll let this missile fly downrange.
This is an elevated probability trade, which is why we are making some sacrifice on profit.
Exit:
Sell to close 5 January 610 calls
Buy to close 10 January 620 calls
Sell to close 5 January 650 calls
As a spread
For a net credit of $2.00 or more.
Firing Line: Peace on earth and good will to all from the
Fox3 Options
team!
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.