Probability of Profit: 85% Max Profit: 65/contract at the mid* Max Loss: 235/contract Break Even: 15.65
* -- I usually like to get these filled for 2.25 or less.
Notes: A slight variation on a term structure trade, which ordinarily uses the corresponding /VX futures price for guidance as to where to set up your spread. Here, instead of using the March /VX future price (currently at 14.57), I'm looking at where VXMT** is currently (at 15.30). I then look for an expiry in which (a) I can set up a spread with a break even at or above where VXMT is; and (b) that costs <2.25 to put on if a long put vertical or for which I receive a credit of >.65 if a short call vertical.***
Naturally, 104 days until expiration is an awfully long time to wait for your candy. Generally, however, I layer these types of setups on over time and take them off at 50% max profit, which generally occurs with about one-half the original time remaining for the setup (in this case, about 50-odd days).
** -- VXMT measures expected volatility in the S&P 500 over a 6-month time horizon. *** -- The max profit/max loss metrics are the same, regardless of which spread you use. For example, the 15/18 short call vertical brings in .65 at the mid, has a max profit potential of 65/contract, a max loss metric of $235, and the very same break even of 15.65 as the long put vertical.
Thank you sir! You are a wealth of information. When I get trades going in layers like that it helps me with patience, one of my main trading weaknesses. VXST (9day?) has been weird, yesterday jittered around and just above VIX much of the session. Thanks again for this post, am adding the info to my notes and keep smiling!
NaughtyPines
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@Tom1trader, Danke. It's one of the trades I will put on "in the background" so that I'm working something in the event a pop isn't forthcoming ... .
Tom1trader
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@NaughtyPines, understand. or should I say ja ich verstehen. I got on IWM and XOP ICs 20 delta $5 wide. Yesterday put on a SPY call BWB BE about 5.50 above pric and .33 credit to take out down side risk. and a kind of (Today) QQQ skewed IC or Lizard with a cap limit leg 155/156 calls 152/149 puts no risk upside (1.23cr). Am going to pursue that kind of lizard more as molds risk nicely with one side no risk and is quicker than a fly.