Combat Options Trading on CTXS
NEW YORK (
) -- When everyone is bullish (I have no idea why), it's time to think about a counter play, and today we have a target in our sights:
Citrix Systems
(CTXS) - Get Report
.
Strategic mindset
: Bearish
After Citrix Systems took a hit a couple of weeks ago when someone in the tech sector sneezed, we're looking at a bearish trade in this name.
Target
: CTXS trading at $65.37
Commit Criteria:
After falling hard a few weeks ago and then regaining some of that lost ground after earnings, the stock is rolling over again. If the stock closes at more than $68 without triggering an exit from the Mid-course Guidance, then we'll close the trade because the uptrend will still be intact.
Tactic
: Long Put Spread (also known as a Bear Put Spread)
The tactic that we're using for this trade is a long put spread. The spread helps reduce the risk of losing money to a drop in volatility.
Tactical Employment
:
- Buy to open 35 December 60 puts
- Sell to open 35 December 55 puts
- As a spread
- For a net debit of 70 cents
- Max risk per spread = 70 cents per share, $70 per spread
- Max profit = $4.30 per share, $430 per spread
- BE (breakeven) = $59.30
Here's how the tactic is employed: We'll buy 35 December 60 puts and sell 35 December 55 puts, as a spread for a net debit of 70 cents. We're buying 35 because of how we manage this $50,000 model portfolio.
The debit represents the maximum risk, and that would be incurred if the spread expired worthless. The stock would have to close at more than $60 on expiration Friday for that to happen. If the stock dropped to less than $55 by expiration Friday, then the spread would be worth its maximum value of $5.00, and we would then profit by the full $4.30. If the stock was at $59.30 on expiration Friday, then the spread would be worth the same amount that we paid to buy it, and we would break even.
Let's look at the Eject Criteria. Where do we get out if the trade starts to go against us? This is critical to trading successfully: knowing when it's time to give the jet back to the taxpayers and get out. We want to preserve our capital and live to fight another day if things go wrong.
According to the commit criteria, if the stock closes at more than $68, then we'll close the trade if we haven't already closed it according to the Mid-course Guidance.
Mid-course Guidance
Eject Criteria
:
50% loss of the initial debit. In other words, if the spread decreases in value by 35 cents, we'll close it. That means that we will sell the spread to close if it decreases to 35 cents.
Profit Goal
:
By going with a further OTM spread, and one that costs so little, we're going to deviate a bit from the Options Pocket Check List, or OPCL. This a proprietary manual we use to trade, and students receive this as part of their in-depth options training at Fox3 Options.
If the spread hits a profit equal to 100% of the debit, then we'll reset the Eject Criteria to the 50% profit. So if the spread increases in value to $1.40, we've achieved a 100% profit. We'll then reset the eject level to the 50% level, which is $1.05.
Once we've hit an exit, we'll close the trade by selling to close the December 60 puts, buying to close the December 55 puts, and we'll do that as a spread, for a net credit.
Exit
:
- Sell to close 35 December 60 puts
- Buy to close 35 December 55 puts
- As a spread
- For a net credit
Firing Line
: Discipline and Risk Management result in Superior Execution. To see this trade managed for maximum profit, or exited for minimum loss, check out the
service. Trading is combat -- stop fighting solo.
Matthew "Whiz" Buckley is a partner at
a provider of options education and practical applications for options traders of all 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. 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 book "From Sea Level to C Level."
