YUM Short Straddle Adjustment to Reduce Risk

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Straddle: In today's quick video we're just going to talk about the one adjustment trade that we had today in Yum, which was our original straddle trade sitting right over where the stock was at about $85. Again, the only adjustment that we made to that today is rolling down the sure call that we have from 85 down to 80 as a strike price.

Again, all we're doing is using a credit spread order or a vertical credit spread order to facilitate this roll. In this case what we're doing is we're selling to open the 80s strike here. The cursor is all over the place. Selling to open the 80s strike and buying back to close the 85. 

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The difference between buying and selling is an additional $82 credit on top of what we already had gotten with Yum. Here's the deal, right, so we originally made this trade back up when Yum was trading. I think it was a little over a month ago now when Yum was trading right around here on $85 and now that the stock has traded lower and now we're getting closer to expiration.

We're taking our short strike, which is at $85 and we're moving that down just a little bit to $80. We're just moving it down just a little bit to give ourselves a little bit more room for the stock to run up if does happen to run up between now and October expiration. Because there's still a little bit of time left.

That also helps gives us a little bit more credit that's left in the trade going forward. Again, you can see here we're on the trade tab here with Thinkorswim, hope everyone's enjoying the new layout. It's a little bit cleaner, but we'll see what happens.

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Again, what we did here is that our 85 short strikes on the call side, these were only worth about $31 right now. It's not worth a lot of money to sit there and-and let it waste away for the next 17 days. So, what we want to do is move that closer to something that's got a little bit more premium in case Yum continues to stay down here.

We want to have a lot more decay out of the value of this thing. This is why this hedge- We always want to take credit, but always is going to give us an opportunity to get into something that's worth a little bit more money in case the stock does continue to fall we want to obviously have the opportunity to make more than $31.

Here's our inverted strangle on Yum now. We've got the $85 sure puts and the 80 calls; our calls are here, our puts are here. This is our inverted strangle. We'd ideally like to see this stock close somewhere between this between now and October expiration.

That's really what we're looking for, looking for the stock to move up between now and October expirations. There's a possibility of doing that. We have earnings coming up which is going to help with the drop in implied volatility. But again, all we're doing right now is making small quick adjustments to the current position to maintain balance as we can and also increase the credit.

As always hope you guys enjoyed this video 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.