Defined Risk Income

We are going to start a running feature on RiskReversal of short premium, defined risk trades. These will be into events where we the implied move is too high, they will be targeting high vol itself sometimes in farther dated months, and sometimes they will be in stock where implied vol isn’t that high but where we feel breakout and breakdown moves are unlikely in a given stock over a given amount of time.

The impetus for this strategy is because we have so many directional trades on the site (which we consider one offs in each case) that we often have a series of long premium trades without a balance of short premium trades. This is a result of demand for those directional trades. But as we’ve said time and time again, long premium directional trades, especially into events when implied vol is elevated is a losing strategy over time mathematically if not paired with an equal or greater amount of short premium trades.

The issue with short premium trades is as one offs, they also have a mathematical disadvantage because your potential gains are often a lot less than the potential risk of an outsized move. Doing just one means you may lose greater than you could have made. In other words, short premium strategies only work in bulk. You have to do them consistently in order to see the profits.

But we’d also like to showcase how these trades can be done in a defined risk manner:

By Dan and CC

Trade: Buy the MSFT (46) July 43/46/49 call fly for 1.35

– Buy 1 July 43 call for 3.30

– Sell 2 July 46 calls at 1.05 (2.10  total)

– Buy 1 July 49 call for .15

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By Dan and CC

Trade: ADBE ($80.35) Sell the June 77.50/75 – 82.50/85 Iron Condor at 1.25

Sell to Open the June 77.50 / 75 put spread at .55

-Sell to open 1 June 77.50 put at 1.06

-Buy to open 1 June 75 put for .51

Sell to Open the June 82.50 / 85 call spread at .70

-Sell to open 1 June 82.50 call at 1.28

-Buy to open 1 June 85 call for .58

By and

Action: ADBE ($78.65) Buy to Close the June 77.50/75 – 82.50/85 Iron Condor for .25 for a $1 profit

[hr]

By Dan

Trade: WMT ($74.90) Buy June 73 / 75 / 77 Call Fly for .75

-Buy 1 June 73 call for 2.21

-Sell 2 June 75 calls at .84 each or 1.68 total

-Buy 1 June 77 call for .22

ACTION – Sold to close the WMT ($73.15) June 73/75 1×2 for .15 for a .60 loss:

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By Dan and CC

Trade: CRM ($69.85) Sell to Open the May22nd weekly 65p/67.5p/72.5c/75c condor at 1.20

– Sell 1 May22nd 67.5 put at 1.20

– Buy 1 May22nd 65 put for .50

– Sell 1 May22nd 72.5 call at 1.10

– Buy 1 May22nd 75 call for .60

By CC

ACTION – Bought to close the CRM (72.60) Weekly 65/67.5/72.5/75 Condor for .40 (.80 profit)
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