OEX Modified BWBs for May

Posted by randomjaywalking

***Disclaimer***

Options involve risk and are not suitable for al l investors. Prior to buying or selling an option, a person must receive a copy of Cha racteristics and Risks of Standardized Options (the ODD). Copies of the ODD are a vailable from yo ur broker, by calling 1-888-OP TIONS. or from The Options Clearing Corpor ation. One North Wa cker Drive, Suite 500, Chicago, Illin ois 60606. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes. In order to simplify the computations, commissions, fees, and margin interest and taxes have not bee in included in the examples used in this presentation. These costs will impact the outcome of all stock and options transactions and must be considered pr ior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. No stateme nt within this presentation should be construed as a recommendation to buy or sell a securit y or to provide investment advice.

For those who are following this blog, the following example BWB trades can be looked at for the month of May. We are going to follow something different this month in that rather than putting on the traditional 1:2:1 BWB

Let’s start with the basics.

After the major markets were spooked by the SEC announcement on GS, the OEX closed 9.19 points down on Friday at $544.68

The VIX moved higher from its previous close of 15.89 to Friday’s close of 18.36

There are 20 more trading days till May expiration.

OEX volatility is currently at 17.65%.

Based on these numbers, the OEX Expected Move range for May is approximately $517 to the downside and $571 to the upside.

5% away from the OEX closing price is also $517 to the downside and $571 to the upside.

Let’s assume a bearish stance to the market so we will be initiating a Put BWB.

A traditional 1:2:1 BWB can be constructed with the following strikes:

Example 1

Long 1 530 Put

Short 2 515 Put

Long 1 455 Put

Credit: $0.05

Max Profit: $1505

Max Loss: $4495

Lower Breakeven: $499.95

Long 1 530 Put

Short 2 510 Put

Short 1 505 Put

Long 2 470 Put

Credit $0.20

Max Profit: $2020

Max Loss: $5480

Lower Breakeven: $497.42