WDIS: Back to Cool

Delta Neutral FCX CC

| Jan 27, 2015
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    WDIS: Back to Cool

    Delta Neutral FCX CC

    Jan 27, 2015

    Tony Battista and Katie start by looking at their Condor position, not to be confused with an Iron Condor, in DIA (SPDR Dow Jones Industrial Average ETF). The Condor is a limited risk, limited profit strategy that is based around a directional assumption. The strategy is comprised of selling a call spread and buying a call spread at the same time in the same expiration month. The Condor strategy has 4 legs and collects a credit on entering the trade, therefore making this strategy a good trade candidate for stocks trading with high Implied Volatility Rank (IV Rank or IVR). The Condor’s max profit is achieved if the underlying stock’s price at expiration is equal to or below the lowest strike price. Alternatively, it can also occur if the underlying stock’s price at expiration is equal to or above the highest strike price.

    They move on to look at FCX (Freeport-McMoRan Inc.), a commodity stock that recently had earnings. After earnings, FCX is trading near its all-time lows. Given this information on FCX, Tony encourages Katie to think of some applicable strategies she could potentially trade in this underlying.

    She lists the following strategies: - Short naked put - Short put spread - Covered call

    Tony suggests taking a look at a strategy they have done before in UNG (United States Natural Gas ETF) that is similar in nature to a Covered Call. The trade consists of buying stock and selling the 25 delta calls.

    Katie navigates to the dough platform to set up the trade. They use the strategies menu to set up a basic Covered Call. To meet the criteria of this trade, they buy 100 shares of FCX stock and sell four of the March 21 calls which each have a delta of 25. By selling four calls each with a delta of 25 (for a total of 100 short deltas), Katie is neutralizing her long stock position by offsetting it with the short deltas.

    While a typical covered call yields no upside risk, this custom strategy resembles a ratio spread in that there is risk to both the up side and the down side.

    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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