Appetite is back on judging by the 7.5% spike in gold mining stocks yesterday. On the last product, we sold a put spread on GCZ6 (for more details
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Source: Saxo Bank
For this bullish-to-neutral strategy, we will use options in the E-mini underlying future (ESZ6). Moreover, we are adding the secret weapon of time decay (theta) to collect on some premium.
This is a 10-point wide vertical put spread and we would benefit in two ways: the index rallies further or the index stays at the current level and closes above 2,150 at expiration.
We are using the end-of-the-month (EOM) options which provide good liquidity.
To keep the risk limited, we are simultaneously going to purchase an insurance with a strike price of 2,140. The buy and sell of these options creates a credit, money paid out, of $2.25/contract or $112.50 ($50 contract size).
Source: Saxo Bank
Management and risk description
Note that these are end-of-month options with eight days to expiration and are European-style, as opposed to the quarterly options which are American-style.
This means that a trade cannot be assigned before expiration. Just like in the standard contracts, the contracts are physically settled with the underlying E-minis futures.
We will plan on closing out of the spread the day before.
Underlying (ESZ6) price at 2165.50
Sell 1 ESZ6 (EOM) 2150 Put @ $9.00
Buy 1ESZ6 (EOM) 2140 Put @ 6.75
Net Credit $2.25 ($50) $112.50 per contract
Maximum gain at expiration = Net credit of $2.25 (112.50)
Maximum loss at expiration = Difference of Strikes - Credit or 10-2.25 = 7.75 x $50 or $387.50
ROR = 29%
Entry: the entry above is inside the B/A, work the order.
Stop: no stop.
Target: collect at least $100.
Time horizon: seven days.
— Edited by Michael McKenna
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Non-independent investment research disclaimer applies. Read more