Closing Out MON for Big Loss

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Option trading loss: In tonight's video, we're going to go over all the trades that we entered on Tuesday, October 6th. I think today was a pretty good day. We had a little bit of everything so a little variety, some closing trades, a couple opening trades and an adjustment.

I actually want to start off tonight by going over the YUM closing trade. So we decided to get out of our inverted strangle in YUM as earnings were approaching and were announced after the bell today. Really we want to get out of this trade because we were inverted. We don't want to hold any type of inverted position especially on the monthly contracts when it's much better to be in the weekly contracts for an earnings type trade.

We just didn't like how things were kind of setting up. We had an inverted spread, we had a profit on so it was really kind of a game time decision. Do you take money off the table or do you kind of roll the dice and try to play earnings and get some more out of this?

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After everything was said and done though, after we made some adjustments to this position, rolling it from just the 85 straddle, rolling it into the inverted 80 call and the 85 put, we ended up buying it back for an 8.30 debit. Still took a $47 profit after all adjustments. And honestly, thank God we did. After hours YUM actually is trading somewhere around $70 right now.

I think that's the last thing I saw. The expected move or what the market was pricing in was a move of about $3.50. So you can see that the market severely underestimated what YUM was going to do and the company just had really, really bad earnings. In this particular instance, it paid off for us and we were able to get out of this trade in, and obviously, make some money in the same vein.

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The other trade that we got out of today is our big MON iron butterfly. So this is very similar to YUM except this one just completely moved against us the entire cycle. Now I'll say this, on this trade, this was definitely a bullish trade. We wanted to have some bullish positions as the market was falling but even though we took a $628 loss after, all adjustments on MON, this did not overshadow all of the other profitable trades that we had, not even close.

We had definitely some trades that didn't work against us but trying to keep our neutral portfolio as much as possible heading into the recent decline in the market, we had to have some positions on there that were decisively bullish, some positions that would make money if the market did, in fact, rally higher. And MON was one of those positions that we maintained pretty much through the entire month.

And again, what we were trying to do is just give ourselves an opportunity to make some money if the market rallied and it didn't. MON, as the chart's loading up here, stayed at about $88 and kind of traded in that range. It really never got close to our short strikes around $100 for our butterfly spread.

All right so here you can see on the chart of MON basically we entered this trade back when the market first started to dip here and centered really everything around the 100 strike in that range. Again, the stock just moved completely against us, implied volatility never really dropped for this thing so at this point we wanted to take it off.

We didn't want to go into the earnings event having a decisively bullish bias. We always like to be as neutral as possible heading into an earnings event. Again, even though it was a big loser and did not in any way, overshadow all the other winning trades that we had, not even close.

The other trade that we made an adjustment to today is our EWZ strangle. We went ahead and rolled up our put side from the 20 strike up to the 24 strike and created basically a straddle that sits right over where EWZ is trading right now.

The reason that ended up working out pretty well is because we wanted to give ourselves a little bit more of a central and neutralized position over EWZ and as a portfolio, we needed more of that bullish type exposure. Making the adjustment on the individual trade itself on EWZ, workied out really well and making the adjustment in kind of regard to the overall portfolio also helped out as well.

Here you can see the stock in emerging markets have kind of really rallied in the last week or so and so we wanted to do something to give ourselves a little bit more balance, get ourselves a little bit back to neutral around where the market's trading right now.

We moved up again, our put from the 20 strike which was all the way out here on the left hand side, moved that all the way up cause we've only got about ten days left to go in expiration, up to the 24 strike. Now you can see that payoff diagram is a lot more neutral and balanced over the market.

It gives us an additional credit which we can use to widen out our break even points and kind of buffer ourselves heading into the last two weeks of expiration here. Two new opening trades that we had today, I'm gonna over the first one actually, OIH. We haven't done a skip strike butterfly or broken wing butterfly, whatever you want to call it, we haven't done one of these in a while.

This ended up working out pretty well, and pricing was pretty decent. The kind of setup is basically what we want to see. For OIH in November, what we did is we did a broken wing put butterfly. What we did is we bought the 31 strikes, we went down $1.00 and sold twice as many of the 30 strikes.

Then we skipped over 29, you can see we did not do one by one by one, we skipped over 29 and we went out and bought the 28 strikes. Now by buying those cheaper strikes out at 28, that allows us to take in an overall credit for this trade. Yes, this is a buy order that you're entering but you're entering the, buy order for a credit in hopes that we're actually going to close it out for a credit as well.

The credit here is key because as you'll see in a second, this is what gives us the opportunity to have absolutely no risk on the top side of this trade. We have no risk if OIH continues to move higher. The reason I want to do this trade is because I'm definitely slightly bullish in tilt on OIH. I think recently it's been a little bit overdone.

The last three days have been huge for the oil markets. I think it's ready for some sort of little pullback. That's why I wanted to give ourselves an opportunity to make some money in case the market does pull back and kind of sit in this range. Also, I don't want to have any exposure if the market does go higher.

I want to give ourselves an opportunity to make a little bit of money if the market for OIH goes higher and basically again, we need some bullish trades in our portfolio. We don't necessarily need any more bearish trades. Here's what it looks like on the actual trade tab here. You can see our positions. We went ahead and bought the 31's.

Notice we went to the next strike, sold twice as many of the 30's, and we skipped over 29 and bought the 28's. Those are going to be a little bit cheaper because they're a little bit further out. That's what allows us to get that additional credit. Here is what our risk profile looks like on OIH.

You can see it's got that nice broken wing butterfly shape to it. It's got a little bit of extra risk on the downside so we're definitely playing this a little bit bearish. The stock right now trading right about 31 right here gives us an opportunity to make money if the stock kind of falls anywhere between 31 and 29.

We've got this nice $2.00 buffer on the downside here in case the markets have been maybe a little over zealous in the last couple days. Gives us an opportunity to make money if the stock kind of lands anywhere between these two ranges. That's where we make the most amount of money but in the same vein, we actually don't lose any money on the topside.

We can make our $17.00 credit. Basically all the puts would expire worthless, we would keep the initial credit that we had to get into the trade. I like that trade in OIH. Again, please review some of the videos that we have on directional trades especially in the bullish section of the website especially if you're new because we go over a lot of examples in there as well with these broken wing butterflies.

The last trade we had today was SLV. SLV is a directional bullish trade but it's, a little bit counter-intuitive to what we're trying to do in the portfolio. It's basically just a pure play on silver. I think the recent rally up is a little overdone and I'm gonna put a position on all the way out in November, saying that at some point between now and expiration, silver's gonna come down just a little bit.

What we did is we bought three of the 16/15 put debit spreads. In this case we are buying the 16 puts, we are selling the 15 puts and we're taking in a or paying a premium of about $60.00 which leaves about $40.00 of premium per put spread that we enter. If you look at SLV in the chart right now you can see even today, it's already down from when entered it.

Again, huge rally up in the security and implied volatility not being as high as it possibly could be right now, we can't do any type of call credit spread or strangle or straddle. Implied volatility is only in the 45th percentile, so it's relatively low. We can't be option sellers here, that's not what we want to try to do so we have to be directional option buyers.

This is probably one of the few cases we've been able to do this in the last couple months. All we're saying is you know what, at some point between now and expiration we're hoping that this stock lands basically 15.5 or so or below. I think we've got a good opportunity to see that happen and the sooner it does it, it might give us or a yield, a nice kind of quick profit on the downside. I just think look, to it's a little bit overdone.

Silver hasn't been really that sharp in the last couple of months and every time that it seems to rally up, it just kind of fades lower. I'm assuming that this is no different than everything else and that this bottoming process is going to take a little bit longer in silver if in fact, we are at new bottom for this particular stock.

I like that position. It's a little bit directional in nature, so of course, make sure that it fits well into your overall portfolio. All right, as always hope you guys enjoy these videos.

If you have any comments or questions, please ask them right below inside the membership platform so that everyone else has an opportunity to see your questions because they might have the same one that you have and it just allows me to answer the same type of question once instead of four or five times in email.

As always, hope you guys enjoy and happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.