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The Double, Double is designed to generate profits when a stock or index remains in a relatively narrow trading range for the medium-term expiration cycles. This market-neutral advisory will make non-directional equity and index option recommendations for any priced stocks and all major market indexes with historically stable volatility skews.
The Double, Double is a single, complex option spread and will be done as one of three hybrid-type trades. A double diagonal is the simultaneous sale of a near-month strangle and purchase of the next available month, closest strike strangle in the same underlying. The resulting position is a hybrid of a short iron condor and two calendar spreads. A double calendar is the simultaneous sale of a near-month strangle and purchase of the next available month strangle at the same strike prices in the same underlying.
All the recommendations of this Advisory will be defined-risk spreads. Our Chief Strategist will recommend trades that meet both our risk criteria and our expectations of achieving price targets. Our risk 'rules' require that we recommend trades where the relative volatilities increase the probability of success while offering sufficiently wide break-even levels.
RED Option created this advisory to offer clients recommendations that have the ability to achieve approximately a 1:1 risk/reward ratio, based on research that shows a statistical advantage of a greater than 50% probability of success. Due to the high volume trades, auto-trade clients are likely to receive a more aggressive trade price due to large order, negotiated pricing.
Example of a Double Diagonal:
- XYZ stock is trading at $100 and it's mid-late Dec.
- Sell the Jan (minimum 3 weeks to expiration) 92/107 strangle (sell the Jan 92 puts and sell Jan 107 calls).
- Simultaneously, buy the Feb 90/109 strangle (buy Feb 90 puts and buy Feb 109 calls).
- Pay a $0.50 debit on the entire opening trade.
- We expect to be able to recommend rolling the short Jan strangle to the Feb strangle, and the short Feb strangle to the Mar strangle to increase the total credit received.
- After all the rolls, the resulting position is a Mar short iron condor (short Mar 90/92 put vertical and short Mar 107/109 call vertical).
- In this example, the risk is $2.50 with a $2.50 reduction in buying power.
- The maximum profit is the total credit received from the rolls minus the debit paid for the initial trade.
- In this example, if the short strangles were rolled for $2.00, the maximum profit would be $1.50, risking only $0.50 to make $1.50.
- The max give up (slippage) over fair value should be $0.15 for self-directed clients, $0.05 for TOS auto-trade clients.
- XYZ stock is trading at $100 and it's mid-late Dec.
- Sell the Jan (minimum 3 weeks to expiration) 95/105 strangle (sell the Jan 95 puts and sell Jan 105 calls) for $5.00 credit.
- Simultaneously, buy the Mar (minimum 2 expirations after near term; e.g. Jan/Mar, or Feb/May) 95/105 strangle (buy Mar 95 puts and buy Mar 105 calls) for $8.00 debit.
- Pay a $3.00 debit on the entire opening trade.
- We expect to be able to recommend rolling the short Jan strangle to the Feb strangle, and the short Feb strangle to the Mar strangle to increase the total credit received.
- After all the rolls, the resulting position is two single-month calendar spreads, one call and one put (long one Feb/Mar 95 put calendar and long one Feb/Mar 105 call calendar).
- In this example, the risk is $3.00 with a $3.00 reduction in buying power.
- The maximum profit is the total credit received from the rolls minus the debit paid for the initial trade.
- In this example, if the short strangles were rolled for $4.50 each time, the maximum profit would be $6.
- The max give up (slippage) over fair value should be $0.15 for self-directed clients, $0.05 for TOS auto-trade clients.
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What is Autotrade?
After subscribing to one or more of the Red Option strategy- based advisory services for
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