Trading Edge 2020 Portfolio -Trade #6 - WMT - Asymmetric Spread
Updated
Ticker: WMT
*This trade is a little more complex, than the others, as it has 2 separate spreads, but stick with me
Position: 1st leg
- Call debit spread
- 21st Feb 2020 expiry
- Long 114 Strike call = $4.85 - D = 0.99
- Short 115 Strike call = $4.25 - D = 0.95
- Net cost of 1st leg = $0.6
Position: 2nd leg
- Put debit spread
- 21st Feb 2020 expiry
- Long 120 Strike put = $3.88 - D = 0.88
- Short 119 Strike put = $3.30 - D = 0.73
- Net cost of 2nd leg = $0.58
Total net cost to run 1x of EACH spread = $1.18 <-------- This is the key number to pay attention to (DO NOT ENTER if this price is above $1.30)
Profit Target/ Exit:
- Maximum profit at expiration is $0.82 (both spreads finish at max value)
- Maximum risk = $0.18 (one of the spreads is guaranteed to finish at maximum value ($1.00), therefore the maximum risk is simply the excess, in this case $0.18
- This gives us a "Return on Risk" (RoR) multiple of 4.5, this is a very good asymmetric trade, but it is entirely dependent on the price paid for BOTH spreads, this is why the highest price i would pay is $1.30 for both spreads, lower than $1.25 would be ideal
- Even the worse case scenario of paying $1.30 would still result in a $0.30 risk to make $0.70, which is still a RoR multiple of 2.3
- Exit, let the spreads run their course for the duration, we are risking the full exposed premium (so limit your risk assuming it will fail)
Rationale:
- The high RoR multiple is the major rationale, coupled with the relatively low risk and entry cost
- So long as WMT finishes within the outlined white lines, the trade will be profitable
- If WMT finishes within the red lines, the trade will achieve maximum profit
- Position size only so that your are risking a relatively small amount, i will risk no more than around $400
- Technically, WMT does appear to be more bullish than bearish, if this does eventuate, then a simple way to play that would be to incorporate a naked bought call, to capture the upside, however this would also make this a directional trade, whereas currently this is a theta dependent trade.
*Note, the specific entry prices will likely vary, however so long as the net cost to run 1x of BOTH spreads is less than $1.30, ideally less than $1.25, then it will still be a valid trade
- TradingEdge
*This trade is a little more complex, than the others, as it has 2 separate spreads, but stick with me
Position: 1st leg
- Call debit spread
- 21st Feb 2020 expiry
- Long 114 Strike call = $4.85 - D = 0.99
- Short 115 Strike call = $4.25 - D = 0.95
- Net cost of 1st leg = $0.6
Position: 2nd leg
- Put debit spread
- 21st Feb 2020 expiry
- Long 120 Strike put = $3.88 - D = 0.88
- Short 119 Strike put = $3.30 - D = 0.73
- Net cost of 2nd leg = $0.58
Total net cost to run 1x of EACH spread = $1.18 <-------- This is the key number to pay attention to (DO NOT ENTER if this price is above $1.30)
Profit Target/ Exit:
- Maximum profit at expiration is $0.82 (both spreads finish at max value)
- Maximum risk = $0.18 (one of the spreads is guaranteed to finish at maximum value ($1.00), therefore the maximum risk is simply the excess, in this case $0.18
- This gives us a "Return on Risk" (RoR) multiple of 4.5, this is a very good asymmetric trade, but it is entirely dependent on the price paid for BOTH spreads, this is why the highest price i would pay is $1.30 for both spreads, lower than $1.25 would be ideal
- Even the worse case scenario of paying $1.30 would still result in a $0.30 risk to make $0.70, which is still a RoR multiple of 2.3
- Exit, let the spreads run their course for the duration, we are risking the full exposed premium (so limit your risk assuming it will fail)
Rationale:
- The high RoR multiple is the major rationale, coupled with the relatively low risk and entry cost
- So long as WMT finishes within the outlined white lines, the trade will be profitable
- If WMT finishes within the red lines, the trade will achieve maximum profit
- Position size only so that your are risking a relatively small amount, i will risk no more than around $400
- Technically, WMT does appear to be more bullish than bearish, if this does eventuate, then a simple way to play that would be to incorporate a naked bought call, to capture the upside, however this would also make this a directional trade, whereas currently this is a theta dependent trade.
*Note, the specific entry prices will likely vary, however so long as the net cost to run 1x of BOTH spreads is less than $1.30, ideally less than $1.25, then it will still be a valid trade
- TradingEdge
Note
Update: unable to get filled at desired price point, trade NOT taken
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