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Strategies & Market Trends : General market lab and commentary
SPY 683.47+0.6%Nov 28 4:00 PM EST
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From: Robohogs1/25/2016 7:53:00 AM
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Trade idea: Apple put in lower close but higher momentum indicators last week. This may be signalling ok trading out of earnings. I will look to sell either a near-in put spread, a far out put spread OR a straddle ATM while buying a strangle at the expected move into earnings. Option 1 is lower probability, modest risk able to be done near 1 to 1 risk. Option 2 is higher probability but higher risk meanng you lose 3-1 or more if wrong.

Option 3 is medium probability as you now lose only on big moves either way (lower odds than 1 as big move up may also create loss) but reward can exceed risk. I should have made 1.5x risk on a similar strategy on SBUX last week but botched exit and made 1x risk. Option 3 works well in confused mkts. I used it on NFLX and SBUX and both worked in similar ranges of actual rewards to risk. If I can get 2.5 theoretical reward to risk, I will do it but because we are early in week actual rewards will likely be .5x risk, but risk unlikely to be fully there 2 given time value of hedges bought.

Some folks prefer to use calendars for similar strategy. Sell high vol current week puts and calls and buy longer dateds. If doing this strategy I prefer to sell the expected move strangle for earnings week, buying the 1 month strangle to hedge. It all depends on expected moves in IV.

JON
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