Option Strategy Adjustments for Dividends

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Option trade adjustments: In tonight's video, we're gonna go over all the trades that we've made for Monday, August 31st. Crazy, right that it's already done with August? Seems like these months, they just start, and you feel like you have the entire month ahead of you, and then it just flies by.

So we're gonna be going over these trades. Today the markets opened up kinda lower; they rallied up a little bit higher. End of the day, pretty decent. I would say an inside day for sure, even though it was definitely outside the normal range that we've been expecting and experiencing the rest of the year.

But nevertheless, it wasn't a big move up or down, as I think most people maybe had thought to come in off the weekend, right, that last week was kinda crazy and then this week, we're gonna have some big move down or big move up.

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But things were pretty quiet, and for that case, we didn't need to do much adjusting, which we'll kinda review all of the portfolios, kinda where we sit neutral-wise on the portfolio, tonight on the strategy call with lead members.

As far as new positions, we had two quick new trades that we entered today. The first is in APC, which was another strangle around the market. We went out to October in this case, sold the 80 calls above the market and the 55 puts below the market, took in a credit of almost two dollars.

So again that credit of two dollars moves our break-even point out just a little bit above 80 and down a little bit below our 55 put. So our break-even points are about two dollars beyond those. And nice wide strangle around APC.

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Now the reason that we decide to do this strangle is that the stock does have a dividend that's gonna be paying out here in the next couple weeks. So, had we done a straddle, even though implied volatility's really high, to do a straddle right around where the stock is trading, we would've been at risk on our call side if the stock, you know, had a little bit of a rally enough to pay that 27 cent dividend in a couple of days.

So for that one reason, we decided to switch up our strategy and do the strangle instead. And again, this is all predicated on just being a little bit forward-looking into the future and just looking forward and saying, "Okay, we've got dividends or earnings or whatever the case is coming up. How does that adjust the strategy that we're gonna go after?"

Had I not looked at that, and we just kinda went off implied volatility percentile, we would have gone after a more aggressive premium selling strategy, like a straddle. But with that dividend, we just don't want to put ourselves in a position where we have to pay the dividend or exit the position early. We don't give the position kinda the full timeline it needs to mature into a nice position.

Now on each side of the market, we entered each position ... thinkorswim still updating here, so it's not that these have zero or N/A, just their system continues to be slow with all the activity and the updating. But on each side, we did enter each leg at about the 15% probability of being in the money on each side.

Now, after we entered that position, the stock rallied a just little bit higher, up to around 71 and a half, so above the 70 strike, which was kind of our center strike as we started this whole endeavor with APC. But we enter the trade very neutral, no directional bias one way or the other. We've tried to do things as even and again as neutral as we possibly could.

The next trade that we got into was an iron condor in FXE. Now we added another iron butterfly to the portfolio here. And again, an iron butterfly's just an iron condor with our short strike's the same price: the 110 call and the 110 put. So our short option's right where the stock is trading right now.

And then we bought options 10 dollars out on either end. So you can see we bought the 112 calls and we bought the 110 puts down below the market. So this gives us a 10 dollar-wide credit spread in either direction. And we took in a nice premium of about 3.62. So a very healthy premium.

This stacks the iron butterfly right on top of an existing iron butterfly that we already have out in September, or I'm sorry, out in October. So now we're starting to build a nice big position in these options for the Euro Trust here. Now as you can see here on the risk profile, the combination that we now have going with the September and October options gives us a pretty nice pay off the diagram.

Now, of course, implied volatility is high in some of the original positions that we entered, so we're kind of in the water on a couple just kinda paper dollars right now. But as implied volatility drops, as the Euro markets maybe calm down a little bit or maybe even trend a little bit higher or a little bit lower, we're sitting with an overall position September and October pretty neutral on the Euro. So things are looking pretty good. I like the position that we have.

We could add to this position. We have room in the portfolio to continue to add to this position. And if we did, we would look to add something on this side of the market. So with the stock trading about 110, we'd look to add something maybe around 111, 112 - just give us a little bit more balance, if we needed to, on the top side just a little bit more neutrality in the position and kind of hone in each side.

So we've got a lot of premium here on the bear side. So if the Euro markets move down, we're well covered there. Could use a little more premium on the bullish side, if we end up legging into another trade. So, like I always like to do, I like to get into these positions a little bit spaced out.

So I don't like to throw all the money or all the contracts in at one time. I think it's a better way of trading because you can be a little bit more nimble and move with the markets. And so I'm just trying to go through that process with you guys here on the video. Now as always, I hope you guys enjoyed this video.

If you have any comments or questions, please let me know. Add them in the comment box right below this video. That way, everybody can see them. It's a lot easier for me, and everyone else has an opportunity to learn from some of the questions that you might have. 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.