I put a Risk Reversal trade on for $YUM on 12/3 (here are some notes from my Trading Journal :
|p/b buy, waited over the weekend; S Dec 65 Put at .70 on 12/3 (1/3), then (1/6); S Jan 62.5 Put at .70 & L the 70/72.5 CS for .03 credit (1.27/.60); BtC Dec 65 Put for .87 for -$.17 on 12/4 (1/2 pos);|
Let’s break down this down a bit.
- p/b = pullback
- Dec = December
- S = Short
- L = Long
- CS = Call Spread
- Jan = January
- BtC = Buy to Close
- pos = position
Here are the steps taken in each trade:
- short the Dec 65 Put at $.70 on 12/3 (a 1/3 size position)
- short more Dec 65 Put at $.70 on 12/3 (a 1/6 position, bringing total to a 1/2 pos)
- then later in the day, short the January 62.5 Put at $.70
- long the 70/72.5 Call Spread at a $.03 credit
- today I kept a watchful eye on the position as it continued to drift down. I put on a very tight leash and ultimately bought the short December 65 Put back for a small loss.
So why would I do that, this step #5? For me, I focus on keeping the losses small – as much as possible. An advantage I have here is that the rest of the trade is in January so I have time on my side, as well as a lot of flexibility to sell more premium to cover the cost of the Call Spread.
One additional note here is this: If I believe that price will continue to drift down, then I focus on being patient and looking for a firmer “floor” in price. Once I see that occur, the following potential scenarios exist:
- Sell the December 62.5 Puts (1/2 pos)
- Sell more January 62.5 Puts. Possibility here is that I can sell less (or undersell) the Puts to cover the cost of the upside Call Spread. What a deal.
- Sell the January 60 Puts if price keeps drifting down