It’s a bold statement … but anyone can regularly make double-digit gains in less than a week – without lots of risk.
For instance, last week in the Daily Profit I suggested a high-probability trade in Google (Nasdaq: GOOG) that made over 20%.
The implied volatility for July options was close to 70%, which led to inflated options prices. What do you do when prices are inflated? As with anything, including options – you sell when prices are high. So that’s what we did.
We sold several different options contracts and booked quick 20%+ gains in about a week.
It’s time to use another options trade to benefit from the high volatility that currently resides in Facebook (NASDAQ: FB). The following example uses the same strategies I use within the Options Advantage portfolio.
I’ll admit it right up front – I have no idea if FB will trade up, down or sideways in the next week, month or year. But I can tell you the EXACT likelihood of each scenario. Moreover, I can use these likelihoods to craft a trade that suits my assumption and risk appetite.
And today, Facebook options are priced at inflated premiums – just as they were with Google last week.
So how can we take advantage of this type of situation?
First, we need to know what the expected move is for FB based on certain options prices. We do this by looking at front-month (options set to expire within a month or less) prices.
Again, to calculate the expected move in a security headed into earnings, we take the average of the front-month at-the-money and out-of-the-money prices.
It’s a little complicated, but basically the market believes Facebook is likely to sell for between $31.63 and $26.37 – given the prices of certain options.
That’s a swing of $2.63 each way from the current price of about $29.
So if the market is pricing in a $2.63 move after earnings are announced, we simply need to construct a trade that will MAKE money so long as shares of Facebook stay within that $2.63 range.
Simply put, we want to be a seller of options.
If we know the expected move is $2.63, a good way to play FB is to sell vertical spreads. In this case, we’ll look at a combination of a call vertical and put vertical, known as an iron condor.
So again, FB is trading at $29 and the market expects a move between $31.63 and $26.37. I plan to choose a spread that is slightly outside of that range.
Sell to open FB Aug12(7) Weeklys 25 puts
Buy to open FB Aug12(7) Weeklys 23 puts
Sell to open FB Aug12(7) Weeklys 33 calls
Buy to open FB Aug12(7) Weeklys 35 calls
The short strikes of 33 and 25 have more than an 85% chance of success with only two days left until expiration. If FB stays between 25 and 33 through expiration, the trade will make over 15%.
Basically, we make money so long as Facebook stays between $35 and $25 in the next few days.
Again, if you would like to learn more about how I use strategies like iron condors, don’t forget to check out my upcoming webinar Thursday.
For many of you this might be quite a bit of information to take in at once. It’s okay; no one said this was easy. But once you are equipped with this information and are familiar with how to use it to your advantage, the world of investing takes on a completely new way of thinking.
If you have any questions about the intricacies of options strategies or using expected moves as a way to trade/invest, please feel free to email me at firstname.lastname@example.org. And follow me on Twitter at @OptAdvantage.