TRADE IDEA: XOP NOV 16TH 41 SHORT/MARCH '19 50 LONG PUT DIAGONAL
Metrics:
Max Loss/Buying Power Effect on Setup: $636/contract
Max Profit on Setup: $264/contract (41.54% ROI at max; 20.75% at 50% max)
Break Even: 43.64 versus 43.58 spot
Debit Paid/Spread Width Ratio: 70.7%
Theta: .84
Delta: -54.75
Notes: I'm not going to put this setup on quite yet, as I would prefer that the price of the underlying be "at the top of the box" (~44.50), but always like to price potential setups out ahead of time and then tweak them a little bit as price of the underlying may dictate. I generally start out looking at these directional setups with the front month short option at the 30 delta and then adjust the back month long so that the break even is as close to the spot price as possible. Additionally, I like to pay less than 75% of the spread width, so that 70.7% debit paid/spread width ratio is a decent metric. You can naturally go shorter in time with the back month (which will result in a cheaper setup), but I like to give myself plenty of time to reduce cost basis in the setup over time with rolls in the event I don't get the movement I need to exit the trade fairly quickly.
As far as trade management is concerned, look to take profit at 50% max, Roll the short put out on significant loss of value (usually 50%), and then recalculate your scratch/take profit targets ... .
Max Loss/Buying Power Effect on Setup: $636/contract
Max Profit on Setup: $264/contract (41.54% ROI at max; 20.75% at 50% max)
Break Even: 43.64 versus 43.58 spot
Debit Paid/Spread Width Ratio: 70.7%
Theta: .84
Delta: -54.75
Notes: I'm not going to put this setup on quite yet, as I would prefer that the price of the underlying be "at the top of the box" (~44.50), but always like to price potential setups out ahead of time and then tweak them a little bit as price of the underlying may dictate. I generally start out looking at these directional setups with the front month short option at the 30 delta and then adjust the back month long so that the break even is as close to the spot price as possible. Additionally, I like to pay less than 75% of the spread width, so that 70.7% debit paid/spread width ratio is a decent metric. You can naturally go shorter in time with the back month (which will result in a cheaper setup), but I like to give myself plenty of time to reduce cost basis in the setup over time with rolls in the event I don't get the movement I need to exit the trade fairly quickly.
As far as trade management is concerned, look to take profit at 50% max, Roll the short put out on significant loss of value (usually 50%), and then recalculate your scratch/take profit targets ... .