(13 votes, average: 4.62 out of 5)
Loading ...I was looking at PCX’s chart thinking it looked like a good options strangle setup. So I figured I would plot it out like I did my SPY chart (read that previous post if you don’t know what an options strangle is or you want to see the SPY options strangle setup)  because I really liked that graphical representation of the options strangle. Here it is (click the image for larger view):
So I really like this setup on PCX. In general, I like a strangle setup on a stock that has made a crazy runup like PCX has. It really fits the “this sure looks bullish so it probably will continue but if it doesn’t it probably will crash as all the mo players get burned and bail”. PCX is known to run big time but it also may just tank instead if it doesn’t run soon after just sitting here for a month. You know there are plenty of mo players getting impatient here.ÂÂ
When you get a stock in the single digits, there are typically only options offered at specific prices like $7.50 and $10 strike prices so doing a strangle is not always very possible. But sometimes you get a stock like PCX that is nearly perfectly in the middle of those two strike prices so it makes for a nice strangle entry. (in fact, I think this might be why stocks often get stuck in this range).ÂÂ
So the breakeven lines and green cone look lopsided on this one. That is because at this low of price, the gains vs. price are highly non-linear. I also drew in a hypothetical good case if PCX ran up to 15 in the next 10 days. Even though 15 is just over the breakeven line at EXPIRATION, if it were to happen well before expiration the net strangle profit is much more, in this case it is 120% profit.ÂÂ
You may point out, well why even do the options play? With PCX in the 8’s, if it runs up to 15 I would make nearly 100% profit anyway, almost what the strangle would. Correct. BUT what if you are wrong and it goes down to 5 instead? Well you would lose lots-o-money, but I with the strangle still make 30% or so.ÂÂ
The only case where I lose money is if PCX does nothing and stays in the green cone. That is entirely possible and it does happen, no trade is a sure thing but in the case of PCX, given its history, and given its recent runup with massive volume, it is hard to believe it will do nothing between now and September.
I have not bought this strangle yet but I may today (Friday).
Caveman,
As of right now the call/put prices are 2.50/2.85 = 5.35 combined.
Then would the breakeven for the call not be $15.35 and $2.15 for the put?
Thanks
Confused,
I think you have it backwards. Looking at the current prices as of just now, it looks like you were looking at the $10 Sept PUT and $7.50 Sept CALL. Those are both in the money so that is why the premiums are higher. A strangle is when you buy both out of the money so you would buy the $10 Sept CALL and $7.50 Sept PUT which are 1.35 & 1.30 as of just now for a combined of $2.65.
Make sense?
btw, buying the ITM call + ITM put like that is known as a ‘gut strangle‘.
It works similar to a regular strangle, except that it will _always_ have some value; it cannot expire worthless. The minimum value for the position will be the difference between the strikes, so $2.50 in this case.
However, you’re still risking more with the gut strangle in this case with $2.85 ($5.35-$2.50) vs. $2.65 net debit for the regular strangle.
The breakevens are calculated from the ‘corresponding’ strikes, so the upper breakeven is the call strike + debit, while the lower breakeven is the put strike – debit. In this case they would be $7.50 + $5.35 = $12.85 and $10 – $5.35 = $4.65, respectively.
Again, very close to the ‘regular’ strangle.
Thanks,
I think my problem was that I am using thinkorswims built in strangle option and I added both the bid and ask prices. The ask price at the moment is displayed only as $2.70 and this must be for both combined.
Update: I just bought the PCX strangle as described above. I got the combined September $10 Call and $7.50 Put for a combined premium of $2.65.
DPeezy,
Nice, good twist on the strangle.
Confused,
Yes, I am guessing they are quoting the combined premium for the whole strangle.
That’s a nice strangle setup Caveman. I might look at doing this myself next week.
I’ll be watching this play. smells delicious.
followed the trade as well; makes good sense:
PCX: combined at 2.70
-also-
LVS: combined at 3.45
Hackster,
LVS, nice setup as well. I actually made a good option trade on LVS at the end of last year.
Caveman
Cheers
Let us have some fun!
Did you play LVS by strangle end of last year?
My last strangle was RIMM earnings…nice.
Hackster,
My LVS play was not a strangle but a close to expiration speculative call. I bought it slighly out of the money about 2 weeks out and it didn’t look good but 3 days before expiration I got a one day spike and cashed out at around 75% or so. It was a fun but stressful one. I don’t do those very often but rather the longer term ones like this PCX one and my SPY strangle that I posted about earlier in the week.
The RIMM one sounds nice. Earnings strangles are fun too but I haven’t had much luck on those. But the market now is a good time to play some of those I think.
Hackster,
So you build houses? Interesting, have you checked out my housing market stuff on my blog? Not the best news or best outlook but you may find it interesting.
Caveman
Yup, lots of fun!
Building for 12 years and land development 6 years. Volume has been down 70% for two years; hoping to stay flat for the year at best although rentals have been great. Trading is my addiction.
Been reading this site for about two years, love it. No financial blog of my own but thought I would post my website. I’ll check out your housing market commentary-thanks
H
Caveman
What do you think about WFC; same look on 60 min chart as PCX and LVS.
It was choice #3 but hesitated, October seems expensive and July seems short on time but has been consolidating for four weeks and priced right.
Hackster,
WFC looks nice too. The main difference I see is in the volume. PCX had the most massive volume on the run up, then LVS, then WFC which doesn’t have near the volume expansion that the other two did. I think that volume either is a strong bullish sign that will lead to further movement up or it is a lot of disappointed people who will bail en masse if it starts to crack down.
Caveman
Nice, I can see the importance in volume, especially for downside momo.
Caveman
What type of confidence do you have in the PCX strangle setup, currently I have a 5% (account value) position in PCX and LVS strangle. Somewhat curious about your position size on this type of trade. I believe there are times when you swing for homeruns, had a 50% in TBT when 30 year T was at 140 and yld <.03% per TBT. Will do the same if Natty hits 2.80-3.00 per UNG, If not it will be a 20-25% position.
H
I have about 40% (of my trading account) on my SPY strangle from a week ago. That is my core trade lately, I have been doing SPY strangles almost continuously for a year or so. When I cash one out, I put up another soon after. The PCX strangle I have about 15%. I actually am quite confident in this type of strangle. Not that I will absolutely win big, but that I won’t lose or won’t lose much. Remember I don’t view these as necessarily holding till expiration. If we get a run or crash sooner I will probably take it and run. If it is say two months from now and not much has happened then I would probably look to bail and preserve the capital in time value that is left. I will try to share how I do cash out or bail on these.
By the way, just looking at UNG per your mention, wow, the volume on UNG sure is looking like a bottom to me. Big time. If that ain’t climactic volume I don’t know what is. And for an example, USO, look at Jan-Feb-March of this year:
http://stockcharts.com/h-sc/ui?s=USO&p=D&yr=3&mn=0&dy=0&id=p44828433622
Took a position in ung at 14.00 (1/3) Natty at 3.72
1/3 at natty 3.00-3.50 scaled on .10/
1/3 at natty 2.50-3.0 scaled on .10/
Will be 50 % leverage at 2.50-3.00
Looking to pu small position with Oct. 20 strike at .85-.90 and will add as we go down
The Hackster
Caveman
USO Jan-march–”exactly”
Hackster
UNG @ 14.00
Near term strangle with June puts at .30 and June calls at .35
Hackster