TRADE IDEA: FXI AUG/OCT 41/36 "SCAREDY CAT" MONIED CALL DIAGONAL
On occasion, I like to take small directional shots without hanging myself too far out there from a buying power perspective because I lack directional conviction or (more often), I'm working a small account where going full on covered call just isn't an option due to buying power effect. FXI has come quite far off off highs and doesn't appear hugely inclined to stop falling, at least in the short term. Naturally, trade war fears could quickly evaporate, and it could rip back up; alternatively, they may escalate, prompting a further sell-off. There are various ways to play my indecision, one of which would be to short straddle and/or strangle the underlying, but the background implied volatility isn't all that great here at 26.9%, so it isn't all that sexy as a pure premium selling play, so I have to think of something else.
One option would be to short put at the 30 delta 40 strike (the Aug 17th's paying .64 with a break even of 39.36), but that's going to cost me roughly 20% of the short put strike (on margin) in buying power and/or invoke full notional value if cash secured. Alternatively, I can just money the covered out of the box by selling the Aug 17th 40 monied covered call (35.97 per one lot; 35.97 break even; 4.03 max profit on call away). Naturally, that's going to hang up 35.97 in buying power, even though the pure dollar and cents payout on call away is quite attractive (11.2% ROC). If you don't want to go that big buying power wise, but potentially realize a similar ROC percentage metric (~10%), there's the "scaredy cat," monied call diagonal with the buying power effect of less than 15% of the full-on covered call ... .
Metrics:
Max Loss on Setup: $455/contract
Max Profit on Setup: $45/contract (9.9% ROC)
Break Even: 40.55 vs. 42.08 spot
Delta: 22.36
Theta: .86
Notes: As always, there's a downside to these. Realizing max profit with a monied generally requires that you wait toward the very end of the front month expiry for all the extrinsic to bleed out of the short, and you can't just "let it lay" as you would potentially with a covered call. Instead, shoot for taking off the whole setup toward expiry (assuming that the short call remains monied) at .05 short of max or consider rolling out the short call "as is" around 4-10 days until expiration for additional credit if you want to milk/reduce cost basis in the setup further.
One option would be to short put at the 30 delta 40 strike (the Aug 17th's paying .64 with a break even of 39.36), but that's going to cost me roughly 20% of the short put strike (on margin) in buying power and/or invoke full notional value if cash secured. Alternatively, I can just money the covered out of the box by selling the Aug 17th 40 monied covered call (35.97 per one lot; 35.97 break even; 4.03 max profit on call away). Naturally, that's going to hang up 35.97 in buying power, even though the pure dollar and cents payout on call away is quite attractive (11.2% ROC). If you don't want to go that big buying power wise, but potentially realize a similar ROC percentage metric (~10%), there's the "scaredy cat," monied call diagonal with the buying power effect of less than 15% of the full-on covered call ... .
Metrics:
Max Loss on Setup: $455/contract
Max Profit on Setup: $45/contract (9.9% ROC)
Break Even: 40.55 vs. 42.08 spot
Delta: 22.36
Theta: .86
Notes: As always, there's a downside to these. Realizing max profit with a monied generally requires that you wait toward the very end of the front month expiry for all the extrinsic to bleed out of the short, and you can't just "let it lay" as you would potentially with a covered call. Instead, shoot for taking off the whole setup toward expiry (assuming that the short call remains monied) at .05 short of max or consider rolling out the short call "as is" around 4-10 days until expiration for additional credit if you want to milk/reduce cost basis in the setup further.