Tuesday, 26 December 2017

Options Trade - Short Straddle on Kroger

A short straddle is an options strategy carried out by holding a short position in both a call and a put that have the same strike price and expiration date. The maximum profit is the amount of premium collected by writing the options. Short straddles are limited profit, unlimited risk options trading strategies that are used when the options trader thinks that the underlying securities will experience little volatility in the near term.

Because KR rocketed from about $20 to $28 in just a few months, I'm betting that the share price isn't going to do much over the next 4 months. So I:

Sold 1 KR Put Apr 20 '18 $28 @ $2.10 ($11.20 commission + $0.01 SEC Fee)
Sold 1 KR Call Apr 20 '18 $28 @ $1.95 ($11.20 commission + $0.01 SEC Fee)

My net premium on the Put is $183.79 and my net premium on the Call is $198.79, for a total of $382.58.

On April 20th, 2018, if shares of KR trade between $25.90 ($28 - $2.10) and $29.95 ($28 + $1.95), the options will likely expire worthless and I will get to keep the $382.58.

If I am put 100 shares @ $28.00, I will actually end up paying $28.00 - $3.83 (options premiums) = $24.17. My cost basis for my 522 shares of KR is $21.33, and adding another 100 at $24.17 wouldn't be so bad.

If I am called 100 shares @ $28.00, I will actually end up selling my shares at $28.00 + $3.83 (options premiums) = $31.83. I will have held the shares for 7 months and made 49% plus a small dividend, ((($31.83 - $21.33)/21.33)*100).

4 comments:

  1. Nice mate. I wish someone would do a demo on my trading account :-)

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    1. Thanks. You could call your broker and ask for instructions.

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  2. Hello - a correction to the way you put the potential outcomes on the expiration - technically a straddle has very, very small chance of ever expiring worthless, for your trade, the price would have to be EXACTLY 28.0 $, not a cent more or less.
    What you quoted as a range is your PROFIT ZONE, but in that zone one of the options will always be IN THE MONEY = will have INTRINSIC value = you'll have to pay some $ to close it.

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    1. I understand what you are saying, but as an example, why would anyone exercise the Put option if the share price was between $25.90 and $28. If they sell me the shares anywhere between these amounts, they will be in the hole.

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