Sep Speculative Trade # 1 – WM Butterfly
The Charts/Video:
Trade Overview:
Income or Speculative: Speculative Butterfly
Trade Details:
| Current delta: N/A | Current IV:46% |
| IV Skew (on ATM strikes): N/A | Open Interest: 4623 |
| Any news/earnings due: No earnings | |
Risk/Reward:
| Risk: $65 | Reward: $418 |
| Yield: 643% | Probability of Success: 43% |
Biggest Risk (Price/Volatility/Time):
Price. Although I am within 1SD, this is a directional play to the downside. If this stock moves up, I will loose.
Breakeven/Adjustment Points:
| Upside BE: N/A | Downside BE: N/A |
| Spread based adjustment points: N/A | Delta based adjustment points: N/A |
| Exit Date (if not adjusted): N/A | |
This is a speculative trade. As such, normal adjustments don't apply. I think that if this is able to close above $40, for two consecutive days then it might be a sign that this trade will not come into the profit zone. I will roll with this though and update you through the comments.
My profit target on this is 100% yield, however if it gets to my short strike tomorrow I may leave it on and let some time pass.
Comments:
Why this trade? Well, COF have announced after market that the sub-prime turmoil has cost them big and are revising their profit forecast. When this hits the market, I suspect that this trade will cause all financial institutions to fall. I'm not going to talk too much about why I think this will profit, as it's a spec trade and it's really a hunch.
The good thing though is that this stock has low HV relative to its IV which means that's if it does fall, it will hopefully fall into the profit zone, and not collapse below it.
As this is a spec trade, I am allocation on a small fraction of my portfolio to it.
To see how this trade progresses, please view the comments below this post or subscribe to the comments RSS feed.
August 31st, 2007 - 12:28
Here is my dilemma. This trade is currently up 88%, and at times has been up over 100% profit. I have continued to hold (despite this reaching my profit target so quickly) as I can see no reason to get out
If I turn this around, and look at this stock as a potential buy I would steer well clear of it, so I decided I need something a little more technical to drive me exit. As you can see, the 30 SMA has provided good resistance recently, and also this stock has bounced off it in the past.
Rather than my arbitrary 40 level, I will now exit when I get two consecutive closes above the SMA. This way, if it continues to fall then it will allow my profits to grow.
On the downside, If I am lucky that this stock trades all the way down to $32.50 (my shorts), I will exit then.
I’ve seen another broker downgrade from buy to hold in the news, so even if Ben does muck about with interest rates, there’s not a lot to drive this stock up.
September 4th, 2007 - 21:05
Today, we had the first close above the 30 SMA, however I still have a profit of 46%. If tomorrow closes above the line I will close out. Hopefully, the pull back in the markets towards the end of trading today gave us some indication the the bulls are not yet quite back in town, although I do think bullish sentiment is returning.
September 6th, 2007 - 19:53
I exited this today for 1.40 credit, a 115% return.
I have formed the opinion the way it bounced this afternoon that it has found some temporary support and I didn’t want to be too greedy.
September 10th, 2007 - 06:37
Great news mate!! I agree on not being too greedy, particularly this month.
Cheers.
September 10th, 2007 - 14:10
I think I was a little premature with my exit. Today, I can close out that same trade for a 2.27 credit or 350% and we still have 10 days to go.
The good news is that using a simple MA and an out of the money butterfly can yeild huge returns provided you can pick direction.