New PFE Straddle with 68% Probability of Success

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Straddle: In tonight’s video update, I want to go over just the two quick closing trades that we had today for Wednesday, November 18th. We tried to get into some other earnings trades today, GMCR and BBY. Now thankfully I guess we didn’t get filled in GMCR although I tried with four different orders to get filled in, kind of prices around where the stock was trading and tried to do a straddle, just for the love of God just could not get filled.

It end up working in our favor because the stock made a move that was more than expected, so a little bit of luck on our side there, but still would have liked to get into definitely the other best buy trade, but just sometimes you just can’t get filled or your price doesn’t seem to work out.

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Today with OIH we went ahead and closed out of just the two parts to our butterfly spread. Again, the original strategy here was the butterfly; we had the broken wing butterfly in OIH. Everything worked out pretty well in this thing.

We ended up opening the original position for credit, end up closing this position for credit, just buying back the two kinds of odd legs here. One that was for the money when that was just out of the money, and overall we took in a nice $64 profit on this trade.

Again, with this broken wing butterfly, just really important to remember that in this particular case we also have the long 28 puts, and there is no point in closing out of those long 28 puts, so we had two of those.

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They are not worth any money and especially with the stock rallying today or the ETF rallying today, it’s not worth spending the commission to close out that portion of the trade. Look, they can act as lottery tickets in case the oil markets crash in the next two days, but in some cases, you don’t have to close out of every single leg of the original strategy, and this is a really good example of doing that.

The other trade that we got into today, a nice little trade in Pfizer which is ticker symbol, PFE, got into a nice straddle. Pfizer, as I said in the comments here, and again just make sure you always read these comments here.

If you want to convert the straddle into a risk-defined trade, like doing an iron butterfly or an iron condor so that it can fit inside of your smaller account or your IRA or retirement account, make sure that you purchase options 4 or $5 out on either end. What does that mean?

That means that if we are selling the 33 calls and 33 puts, you might want to also buy the 38 calls maybe, and maybe you sell the puts at 27 or something. You want to do something where you are buying options on either end to give yourself that risk defined feature to the trade.

Now, of course, it’s going to cost a little bit of money out of your $216 credit. That’s why in the long-term this strategy is going to win out a little bit more than saying iron butterfly would. We have shown that before on our portfolio stats, but you guys can see anytime, it’s live updated.

This strategy, the straddle is going to win out just a little bit more, it’s going to make just a little bit more money because we don’t have to buy those extra legs, but of course, it does carry some additional margin. Now this trade still has about a 68% chance overall of being a nice winning trade.

Trade is in the 68 percentile right now so with PFE there is nothing really on the horizon that we have to be worried about. There are no earnings right now; there are no dividends coming out. It’s just a really good neutral kind of bias trade towards the market, everything trading right around 33 or so.

Hopefully, we’ll see a nice drop [inaudible 00:03:21] for Pfizer with the next couple of weeks, and that’s obviously going to give us the biggest bang for our buck to see that drop in volatility. As always I hope you guys enjoy these videos. If you have any comments or questions, please ask them right below, and 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.