Quick Take: The Bearish – Billionaire, Risk Reversal Strategy
Holding Period: One to twelve weeks.
Stock: Bearish Market Edge Opinion – No stock position.
Option Positions: Two separate transactions.
1) Combo Trade: Short a 75–90 day ATM put, long a 75–90 day ATM call and long a 75–90 day ATM +1 call resulting in a debit.
2) Weekly Put Credit Spreads: Short an ATM weekly put and long an ATM -1 weekly put resulting in a credit. The credits from selling the weekly put credit spreads should help pay for the long ATM +1 call in the Combo Trade.
Desired Result: Stock moves down in price.
Cash Requirement: The debit paid for the Combo Trade plus the width of the weekly put 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 rises in value, the loss would be the Combo Trade’s debit plus the width of the call spread less the credits received from selling the weekly put 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 call provides upside protection and also reduces the cash requirement for the transaction. Since you are buying premium (the ATM +1 call), you want to sell the weekly put credit spreads to pay for that call. Ideally, the weekly credits will offset the premium paid for the ATM +1 call but if the stock moves down quickly, the put spreads could lose money. Usually, but not always, a weekly put spread’s loss is offset by an increase in the value of the Combo Trade.
The Stock Closes Lower At Expiration:
The Combo Trade:
- The long-put component of the trade would settle in line with the stock.
- The call spread, short ATM call – long ATM +1 call 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 put 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 below the short put strike price but the loss would never be more than the width of the spread. There is no spread loss if the stock closes above the short put strike price. The spread loss is offset by the gain in the long put part of the combo trade.
The Stock Closes Higher At Expiration:
The Combo Trade:
- The long-put component of the trade would expire worthless.
- The call spread, short ATM call – long ATM +1 call would offset the rise in the put.
- The dollar value of the Combo Trade would be lower than the initial debit.
The Weekly-Credit Spread Trades:
- The credits from the weekly put 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 below the short put strike price but the loss would never be more than the width of the spread. There is no spread loss if the stock closes above the short put strike price.
Current Bearish – Billionaire Risk Reversal Positions
New Positions: None
| The Market Edge – Market Posture: | Neutral | 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 | 10/30/20 | 10/30/20 | Spread | Spread |
| Stock | Price | Weeks | Price | Exp. Date | ATM SP | ATM SP | ATM -1 SP | Debit | ATM Call | ATM +2 Call | Credit | Loss |
| MCD | 214.22 | 9 | $225.36 | 12/18/20 | 220.0 | 220.0 | 210.0 | $4.05 | 225.0 | 227.5 | $1.11 | ($1.39) |
| WMT | 137.04 | 9 | $142.20 | 12/18/20 | 140.0 | 140.0 | 135.0 | $4.85 | 143.0 | 144.0 | $0.35 | ($0.65) |
| DE | 209.71 | 8 | $234.89 | 12/18/20 | 210.0 | 210.0 | 200.0 | $11.50 | 235.0 | 257.5 | $1.15 | ($21.35) |
| BA | 168.96 | 3 | $161.91 | 01/15/20 | 170.0 | 170.0 | 165.0 | $16.05 | 162.5 | 165.0 | $1.02 | ($1.48) |
| $0.00 | ||||||||||||
| $0.00 | ||||||||||||
| $0.00 | ||||||||||||
| $0.00 | ||||||||||||
| $0.00 | ||||||||||||
| $0.00 | ||||||||||||
| 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 | ||||||||
| 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.