The Bullish – Billionaire Risk Reversal Strategy For The Week Of 04-10-23

by | Apr 10, 2023 | Billionaire Trade

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.

Scenario #1: The Stock Closes Higher At Expiration:

The Combo Part Of The Trade:

  1. The long-call component of the trade would settle in line with the stock.
  2. The put spread, short ATM put – long ATM -1 put would expire worthless.
  3. The dollar value of the Combo Trade would be higher than the initial debit.

The Weekly-Credit Spread Trades:

  1. The credits from the weekly call spreads would accumulate and add to the overall profit.
  2. The total amount of weekly credits would be dependent on the number of weeks that the trade is open.
  3. 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.

Scenario #2: The Stock Closes Lower At Expiration:

The Combo Trade:

  1. The long-call component of the trade would expire worthless.
  2. The put spread, short ATM put – long ATM -1 put would offset the decline in the call.
  3. The dollar value of the Combo Trade would be lower than the initial debit.

The Weekly-Credit Spread Trades:

  1. The credits from the weekly call spreads would accumulate and reduce the overall loss.
  2. The total amount of weekly credits would be dependent on the number of weeks that the trade is open.
  3. 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 During The Hold Period And What Action Should I Take?

Normal Trading Week:  

  1. The Combo Part Of The Trade: Hold the combo position for 12 weeks unless the underlying stock’s Opinion is downgraded by Market Edge. If that occurs, all option positions should be closed and the trade is over.
  2. If the underlying stock closes above the long call strike, hold the position (unrealized gain).
  3. If the underlying stock closes below the long call, hold the position (unrealized loss).

The Weekly-Credit Spread Part Of The Trade:

  1. At expiration, if the underlying stock closes at or above the weekly short call strike price, close the spread (realized loss equal to the spread width minus the credit amount).
  2. At expiration, if the underlying stock closes at or below the weekly short call strike price, close the spread or let it expire (realized profit equal to the credit amount).

Underlying Stock Has A Big Run Up Week:  

  1. The Combo Part Of The Trade: Lock in profits by rolling up the long deferred call if possible. When you roll up a position, you are locking in some of the profits from the stock’s move. For example. If you have a stock that has moved up in price from $100 to $140 and the call has moved up to 45, you can roll up the position  by selling the 100 call and buying a 120 call at the same time (one ticket). The difference is 20 points in intrinsic value so you would want to capture as much of that gain as possible. Depending on the time remaining to expiration, the discount you receive will vary. Try not to give up more than 20% to 30% of the potential profit so in this example you would want to get at least a $14 to $16 credit.
  2. Don’t roll up the position and understand that the large unrealized gain remains at risk.

The Weekly-Credit Spread Part Of The Trade:

  1. At expiration, if the underlying stock closes at or above the weekly short call strike price, close the spread (realized loss equal to the spread width minus the credit amount).
  2. At expiration, if the underlying stock closes at or below the weekly short call strike price, close the spread or let it expire (realized profit equal to the credit amount).

Current Bullish – Billionaire Risk Reversal Positions

 

The Market Edge – Market Posture: 12 Week Hold Average Credit %: 39.7%
Current Stock Price Is Monday Morning Bullish
Initial Current Combo Combo Combo Open Short Long Call Max Credit
Long Stock # Of Stock Combo Long Call Short Put Long Put Combo 03/31/23 03/31/23 Spread Credit % Spread
Stock Price Weeks Price Exp. Date ATM SP ATM SP ATM -1 SP Debit ATM Call ATM +2 Call Credit Spread Loss
ADBE $375.00 3 $374.05 06/16/23 375.0 375.0 370.0 $25.48 375.0 380.0 $2.12 42.4% ($2.88)
MCD $271.33 3 $282.00 06/16/23 270.0 270.0 265.0 $10.45 272.5 275.0 $0.95 38.0% ($1.55)
PG 149.75 1 $149.75 06/16/23 150.0 150.0 145.0 $2.85 150.0 152.2 $0.85 38.6% ($1.35)
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 Billion Stock
Stock Weeks Price % P/L % P/L Reason
NONE

 

 

 

 

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.