WDIS: Back to Cool

Contrarian AAPL Play

| Jan 30, 2015
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    WDIS: Back to Cool

    Contrarian AAPL Play

    Jan 30, 2015

    It's Friday and co-hosts Katie and Tony Battista want to put on a few trades before the weekend! But before they do just that, they dive into the Broken Wing Butterfly strategy they recently traded in SPY (SPDR S&P 500 ETF Trust). The team states what their potential max profit is, what their potential max loss is, and what their directional assumption is on the trade (slightly bearish).

    In brief, the Broken Wing Butterfly is a variation of the standard Butterfly strategy in that it establishes a directional bias rather than maintaining a neutral bias. A Broken Wing Butterfly is skewed to one direction, which entails one of the long strikes being further away from the short strikes than the opposite side (i.e. 5 points wide on one side, 7 points wide on the other). This transfers risk to the side with the long strike that is further away from the short strike. That transfer of risk is what constitutes this strategy as a directional play. Depending on whether it is a call or a put Broken Wing Butterfly, this strategy is a 2-for-1 deal because you’ll always have either an embedded short Call Vertical spread or embedded short Put Vertical Spread.

    When stocks are trading in high Implied Volatility (IV) environments, long Butterfly spreads are less expensive than they are during periods of low Implied Volatility environments. Collecting a credit for the trade mitigates all risk to the downside, while simultaneously reduces our cost basis thanks to the embedded vertical spread.

    Katie and Tony then dive into re-entering an AAPL trade. The stock is trading at a price extreme with a mid-level Implied Volatility Rank (IV Rank or IVR). While they cannot collect 1/3 the width of the strikes (which is the ideal minimum credit for a typical Call Spread), they are still able to collect over $1.00 in credit, looking to get filled at a price they want.

    Finally, they look at one more trade in MSFT (Microsoft Corporation). This is another stock that has taken a hit post-earnings. However, rather than trade a directional trade to the upside (a bullish play), the duo stays neutral with a short strangle and focuses on merely collect premium from the inflated Implied Volatility.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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