Examples of Opening, Closing & Hedge Option Trades

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Option trades: In tonight's video update, we're going to be going over the three new trades that we had today. We had one opening, one closing and one hedge trade for July 6th. We'll start with the adjustment trade that we made to FXI; now this is a trade that we talked about with Elite members on the Sunday night strategy call where we walked through this because we knew FXI was going to be potentially moving lower at the start of today.

On Monday, given all the news that's come out over the weekend with Greece and their no-vote and rejection of the bailout. We knew FXI was going to be moving lower and we had talked about moving down our short calls from 48 to 46. Well, we ended up just moving them down from 48 to 45.

We did that via a vertical credit spread. This credit spread isn't a new opening order; it's a hedge trade as we said in the alert and all we're doing is we're buying back the 48 calls that we're short, and we're re-selling the same amount of calls which will be two at the 45 strike.

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What that does is that gives us a net credit of 52 cents which helps add to the overall premium of the entire trade, helps widen our breaking even points by another 52 cents on either end. The whole idea here is that we're just buying back some of the cheap stuff and reselling something a little bit closer to where the stock is trading right now.

Here's a look at FXE, or FXI. You can see the gap down lower that I had today. It was down about 4% and so what we did has we had our calls up here at 48. Those are now far out of the money, practically worthless at this point. We rolled them closer to where the stock is trading.

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The only reason that we did this now is that we're starting to get short on time between now and expiration. We still have almost about two weeks to go here, so it's not like we're pressed up against the clock. We do have less and less time every single day. Now that we're getting closer to expiration in July, we can be a little bit more aggressive with some of the trades that we want to do and some of the adjustments.

Everything still looks pretty good for FXI; we'd like obviously the stock to rebound a little bit. If it does continue to move lower, we can continue to roll down this call side. The other trade that we had today is our closing trade in TLT. We bought back one set of our Iron Condors that we had in TLT for a nice profit.

We bought back the 122/125 calls and the 112/109 puts. This was one of our original Iron Condors that we put on. I believe that we put it on for about 68 cents, bought it back for about 30 cents, so just over 50% of the max gain, which is really what we're targeting around TLT. You can see with the stock; it was up another $1.00, or $2.00 today.

Again on the Greek news but implied volatility's come down just a little bit, still very elevated but more or less the entire month that we've had this position or three weeks I want to call it, the stock's been sideways. It's been trading range bound with high implied volatility, that works really good for Iron Condor.

We still have another couple on that we're going to keep and hopefully continue to manage these as we get closer and closer to expiration. Take these off at some more profit. The position that we had today was our new entering order in FXE. We again stacked another Iron Butterfly very wide again with FXE.

We just really have to continue to go after this high implied volatility that the market is presenting to us. This is where it's presenting it, is these three securities right now; TLT, FXI, and FXE. We are stacking another trade on top of our current August position, centering everything this time around the 109 strike.

You can see both on the call side and the put side, we're selling the 109's, which is that first number in each of the option chains or the orders. I have a straddle right over the market at 109 and then what we've decided to do is go out $10.00 on either end and buy protection $10.00 out. We went out to the 119's; we bought the 119 calls.

They're very cheap, but they offer some protection. Same thing on the lower side, we went all the way down to the 99 puts. Bought those, they're very cheap, but they offer us some downside protection. Overall, the buying and selling we took in a nice big credit of $366.00 on each of those FXE positions.

When again you look at the chart here of FXE, the stock was moving a little bit today; it was down most of the day and kind of ended just a little bit higher. You can see implied volatility is still really, really high. We just have to keep trading this, right, I mean it's been more or less range bound for the last couple of months.

We've made some really good money in FXE, got to keep going back to the well here. We got to keep selling premium. We're just stacking this trade right on top of one another. This is what the FXE position looks like as far as where we placed our strikes, which might help out as well. We'll close up here July, and this is where August is.

You can see, we already had that existing position in FXE with everything centered around the one 112 strike. That was already in place; we are not touching that, we're just stacking this one right on top. Now we're centering everything around 109, which is basically where this stock was trading when we entered it.

You can see that everything is very systematic in how we enter these positions. We're just taking what the market gives us. If the market moved higher, we would have centered this new trade a little bit higher. Given that the market's moved lower, we're centering it around 109. That gives us kind of an average or blended midpoint around 110 and a half or so.

Our average price or where we want this stock to end up is just a little bit lower than 112 now. Now that we've got most of the position down around that area. We look at the actual payoff diagram here; you can see that everything that we have for August is now centered like I said, right about 110 and a half. That's ideally where we want it to be.

It looks more like an Iron Condor here, but it's still two separate Iron Butterflies that are overlapped here. We've got a really nice wide base going so we still can see the stock move all the way down to about 106 and a half before we lose money and all the way up to about 114 before we lose money on the top end.

The Very wide range for this thing to trade. Again if implied volatility drops anytime between now and expiration, this will show a profit much, much quicker than expected. All right, so those are all the trades that we made today. As always if you guys have any comments or questions, please add them right below on the trading alert page inside the platform. Until next time, 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.