Jan 31, 2012
Option Block 124: Confessions of a Juice Buying Junkie
Trading Block: It was a calm day in volatility, given that it has been beaten up recently. What effect does Greece's financial woes has on our market anymore? The precious Metals market pulls back, affected by China. The yellow Wiggle is out: Australia is in turmoil! The biggest kids brand is in the toilet, sold Wiggles sold!!! Scalping tech Vol.
Odd Block: Unusual activity in Pfizer Inc. (PFE), Cell Therapeutics Inc. (CTIC) (an odd block special!), and RenRen Inc. (RENN). It looks like Facebook love is spreading to RENN.
Mail Bag: The weekly butterfly risk and reward
I've seen recommendations to make profit equal to risk, instead of trying to get the peak profit on butterflies - I totally agree with this. Now the question I have is: What should be the relationship of debit to risk? I lean toward making my debit the full risk and leaving enough upside to make a 1-to-1 return. And in my example below I have - if I can buy 10 contracts for a debit of $0.80, my peak profit in this example will be $3.50, my maximum loss would be $0.80 and a profit taking of +$0.80 versus a scenario where I buy 20 contracts on a debit of $0.80, my peak profit is $3.50, my maximum loss is $0.40 and a profit taking would be $0.40. So risking the same amount to make more contracts to make possibly less but also having less loss on the downside. Since weekly have so much gamma risk, it makes sense to me to define max risk as the debit instead of worrying about exiting if the market is moving quickly. What do you think? Other ideas?
Around the Block: Earnings: Amazon coming out after the close tomorrow. Numbers: Non-Farms on Friday, this week we might see some numbers pop.
For more information on Mark’s webinar with ICE on weekly options, please click here: https://icewebinar.webex.com/icewebinar/onstage/g.php?t=a&d=661422660.