At the beginning of June we placed a range trade on WMT that looked for the stock to find some footing after a recent sell off and possibly consolidate around the 75 level:
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
Rationale: This trade structure offers a high probability trade of success for at least a small profit in the next two weeks. It’s max gain is near where the stock is currently trading. The risk of course, is a breakdown to lower lows or a sudden move higher. We’ll keep a stop around the wings of the trade (73 and 77) and look to be patient as long as the stock is near $75 as it will gain in value as long as that’s the case and there are no sudden moves higher in implied volatility.
This trade was part of a new section of the site grouping defined risk short premium trades as an ongoing strategy. (You can see those trades here.) The point we’ve made on these trades is that they somewhat depend on being thought of as a whole. Some will not work out, like this one, while others will and the strategy has been profitable so far. Over time the math in very much in your favor and regularly fading movement in the options market is a great way to add income to your investment portfolio. Since part of our mission statement here at RiskReversal is to demonstrate how options can be used for various purposes like income generation but in a defined risk manner we feel that this strategy will be useful in that we’re going to stick with defined risk structures. There’s no risk of blowing up in any single one of these trades and we’ll be very clear what can be lost on any given trade. In the case of this WMT trade the most that could be lost was .75 even if the stock went to zero or $150.
But there’s also risk on expiration, and that’s what we have on this losing trade that we need to clean up before the closing bell.
Right now the 73 call is in the money. What that means is if it closes here we will be long WMT stock on Monday morning. That’s obviously not the intention with this trade so we have to manage it and take the loss:
ACTION – Sold to close the WMT ($73.15) June 73/75 1×2 for .15 for a .60 loss:
– Sold to close 1 June 73 call at .17
– Bought to close 2 June 75 calls for .01 (.02 total)
In hindsight we should have closed this trade yesterday for less of a loss but it’s important to close it before the close today so that we don’t get assigned stock for Monday.