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BookingAlpha Option Trading Advisory

Tuesday, September 23, 2014

December 2014, IWM Long Call

Today I entered the following low risk, very speculative play using December IWM options:

By risking only 1.11 debit ($111), if this trade is a 100% loser it will cause a very small portfolio draw-down of less than 1%. Again, that's assuming it becomes a 100% loser.

The idea with this play is to wait for the market to rebound from here to December expiration (November and December are historically very strong months). When/If a rebound takes place, the plan is to sell a farther out of the money Call for the same value at which I acquired the 118 IWM Call today. That is, if I get to sell, for instance the 120 IWM December Call for 1.11 credit at some point, that will mean I have a Bull Debit Spread with no risk at all and potential Max profit of $200. If I get to sell the 121 IWM December Call at some point in the future for 1.11 credit, then again, I'll have a Debit Bull (Call) spread with no risk and potential max Profit of $300.

If I get to sell the farther out Call for a credit better than 1.11, then I will have a minimum locked in gain, with potential for more profit.

To illustrate this scenario, let's say I am able to sell the IWM December 120 Call for 1.31 credit in the future. In this case, I would end up with a 118/120 Bull Call spread with a locked in, guaranteed gain of 0.20 ($20 bucks) and with potential max profit of $220 if IWM trades higher than 120 by December expiration.

Very small play. Very low risk. I won't follow it each weekend as part of the portfolio analysis as it is pretty much a put and forget play. It barely consumes any margin in the portfolio at all as it is a debit transaction. If it doesn't work I'll let it expire for a full loss but that will be in 3 months. So, I think it would be pointless and boring to monitor it every weekend given the time to expiration, the small buying power it consumes, and given that the whole action plan was already laid out in this post.

Check out 2014 Track Record

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  1. I like this trade a lot. I will do the same if we approach 110 on IWM. Thanks for the idea. I have not thought about such a strategy. You can always finance it by selling a far OTM credit put spread in case Plan A does not work out.

    This is why I love options trading. It gives us so many ways to structure our trades that fits our risk profile.

    You can follow me on Twitter @lienjonathan where I tweet my 90% probability credit spread trades in real-time for free.

  2. Thanks for the feedback man.
    I really don't plan to defend it or anything, as it represents less than 1% of the portfolio. It will truly be a set and forget. Long time till expiration, small debit.

    As for financing that debit via a Credit Put spread, yes, you can always do that too, just keep in mind that in that case the whole combo wouldn't be a risk free trade, as you would have downside risk on that Put spread.

    Will see how it plays out