On Thursday I had put on a lotto Put Spread trade in $GLD as it continued to show weakness. On Friday I was fortunate enough to get some good value out of the Long piece of the trade ($115 Put) and happened to catch the nice launch as buyers stepped in near the $115 level & bounced it to closed above $119.
Given the visibility into several very large trades in $GDX I have elected to plan for a new Long trade using Options and stock:
- Long stock (current is 24.45) at 1/2 position
- Short the July 12 weekly 24 Straddle at $2.21 (1/2 position). The Call closed at 1.38 & the Put at .83 on Friday
This trade design is something that I use more and more as it meets a key goal that I have for every trade: I want Flexibility. If the market tells me I am right, then awesome. If the market tells me I am an idiot, I say, ok, and adjust the trade.
The premise behind this setup is that my stock position size starts out at 1/2 so I can reduce/increase it at any time where appropriate. By selling the Straddle, with a few weeks to work it, I give myself a range of 21.79 to 26.21 on the Option pieces.
Here are a few potential scenarios that help illustrate how to work this trade:
1) The stock goes nowhere. Sounds good to me. The Option pieces will expire and I keep the premium collected (this lowers my cost basis if I remain Long the stock). I can then sell a new Straddle, Strangle, Call, Sell the stock, or do nothing.
2) The stock goes to $23 at expiration. In this scenario I will need to buy back the Short 24 Put, the Short 24 Call expires, and I am down $1.45 on the stock. I would likely adjust the Straddle down though, this is what I do the majority of the time to increase/reduce my cushion on a trade
3) The stock goes to $25 at expiration. In the scenario, I will need to buy back the Short 24 Call or the Long stock will get called away (sometimes I just allow this to happen). The Short 24 Put expires & I keep all premium collected (the gains on the trade minus the $.45 difference between stock entry & Short Call strike)