Quick Take: The Bullish – Billionaire, Risk Reversal Strategy
Holding Period: One to twelve weeks.
Stock: Bullish Market Edge Opinion – No stock position.
Option Positions: Two separate transactions.
1) Combo Trade: Long a 75–90 day ATM call, short a 75–90 day ATM put and long a 75–90 day ATM -1 put resulting in a debit.
2) Weekly Call Credit Spreads: Short an ATM weekly call and long an ATM +1 weekly call resulting in a credit. The credits from selling the weekly call credit spreads should help pay for the long ATM-1 put in the Combo Trade.
Desired Result: Stock moves up in price.
Cash Requirement: The debit paid for the Combo Trade plus the width of the weekly call spread (difference between the strike prices). Depending on the price and implied volatility of the underlying stock, the cash requirement for the transaction should vary between $500 – $3,000. Potential leverage: 6-20:1.
Maximum Risk: If the stock declines in value, the loss would be the Combo Trade’s debit plus the width of the put spread less the credits received from selling the weekly call spreads.
Summary: The risk reversal strategy produces a gain or a loss in line with the movement of the stock’s price. The long ATM -1 put provides downside protection and also reduces the cash requirement for the transaction. Since you are buying premium (the ATM -1 put), you wat to sell the weekly call credit spreads to pay for that put. Ideally, the weekly credits will offset the premium paid for the ATM -1 put but if the stock moves up quickly, the call spreads could lose money. Usually, but not always, a weekly call spread’s loss is offset by an increase in the value of the Combo Trade.
Possible Scenario #1: The Stock Closes Higher At Expiration:
The Combo Trade:
- The long-call component of the trade would settle in line with the stock.
- The put spread, short ATM put – long ATM -1 put would expire worthless.
- The dollar value of the Combo Trade would be higher than the initial debit.
The Weekly-Credit Spread Trades:
- The credits from the weekly call spreads would accumulate and add to the overall profit.
- The total amount of weekly credits would be dependent on the number of weeks that the trade is open.
- There would be a spread loss each week that the stock closes above the short call strike price but the loss would never be more than the width of the spread. There is no spread loss if the stock closes below the short call strike price. The spread loss is offset by the gain in the long call part of the combo trade.
Possible Scenario #2: The Stock Closes Lower At Expiration:
The Combo Trade:
- The long-call component of the trade would expire worthless.
- The put spread, short ATM put – long ATM -1 put would offset the decline in the call.
- The dollar value of the Combo Trade would be lower than the initial debit.
The Weekly-Credit Spread Trades:
- The credits from the weekly call spreads would accumulate and reduce the overall loss.
- The total amount of weekly credits would be dependent on the number of weeks that the trade is open.
- There would be a spread loss each week that the stock closes above the short call strike price but the loss would never be more than the width of the spread. There is no spread loss if the stock closes below the short call strike price.
What Can Happen At Expiration And What Action Should I Take?
The Combo Trade:
- Option Positions: Stock price closes up or down. Hold For 12 Weeks Unless Downgrade
- Long 90-Day Call If In The Money (ITM). Close
- Long 90-Day Call If Out Of The Money (OTM). Nothing
- Short 90-Day Put: If In The Money (ITM). Close
- Short 90-Day Out Of The Money (OTM). Let It Expire Worthless
- Long 90-Day -1 Put: If In The Money (ITM). Close
- Long 90-Day Out Of The Money (OTM). Let It Expire Worthless
The Weekly-Credit Spread Trades:
- Short ATM Call: If In The Money (ITM) Close
- Short ATM Call: If Out Of The Money (OTM) Let It Expire Worthless
- Long ATM Call: If In The Money (ITM) Close
- Long ATM Call: If Out Of The Money (OTM). Let It Expire Worthless
Current Bullish – Billionaire Risk Reversal Positions
New Positions: None
| The Market Edge – Market Posture: | Bearish | 12 Week Hold | ||||||||||
| Current Stock Price Is Monday Morning | ||||||||||||
| Initial | Current | Combo | Combo | Combo | Open | Short | Long | O-Call | Max | |||
| Long | Stock | # Of | Stock | Combo | Long Call | Short Put | Long Put | Combo | 11/06/20 | 11/06/20 | Spread | Spread |
| Stock | Price | Weeks | Price | Exp. Date | ATM SP | ATM SP | ATM -1 SP | Debit | ATM Call | ATM +2 Call | Credit | Loss |
| WMT | 137.04 | 10 | $139.59 | 12/18/20 | 140.0 | 140.0 | 135.0 | $4.85 | 140.0 | 142.0 | $0.92 | ($1.08) |
| DE | 209.71 | 9 | $229.89 | 12/18/20 | 210.0 | 210.0 | 200.0 | $11.50 | 230.0 | 232.5 | $1.60 | ($0.90) |
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| ATM = At The Money. SP = Strike Price | ||||||||||||
| Open Combo Debit = Long ATM Call Minus Short ATM Put Plus Long ATM -1 Put | ||||||||||||
| Closed Positions | ||||||||||||
| # Of | Close | |||||||||||
| Stock | Weeks | Price | % P/L | Reason | ||||||||
| BA | 3 | $144.39 | -7.1% | Downgrade | ||||||||
| MCD | 9 | $213.00 | -14.5% | Downgrade | ||||||||
Results for this week’s trades will be posted over the weekend on the Scoreboard.
The information contained herein has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options. No representation is made that any account is likely to achieve profits or losses similar to those shown. Due to the possibility of human and/or mechanical error by The Optionomics Group LLC, Inc., its sources or others does not guarantee the accuracy, completion or availability of any information contained herein and is not responsible for any errors or omissions or for results obtained from the use of such information.