I keep a basket of stocks that I call my Submarine Basket. The simple process is to buy/ be bullish on solid, but beat up stocks for a rebound. I sold my $KORS today from this basket so I wanted to look for a replacement. I settled on $DE.
I chose to sell a Put Calendar using the weekly & monthly strikes for August. Here is the trade:
I am short the August 80 Puts at $.89
I am long the August 9 weekly 80 Puts at $.14
This was done for a credit of $.75
Here are some scenarios to show how this trade could play out:
1) the stock goes nowhere, churns, both pieces expire at their expirations. The credit is the gain.
2) the stock bounces to $84. both pieces expire at their expirations. The credit is the gain.
3) the stock falls to $80 by Friday, 8/9/2013. At this point, I have to decide if the $80 level can hold, or use the credit to adjust the remaining short monthly piece.
On any large flush below the $80 level, owning the weekly Puts helps to protect the short monthly Puts – until expiration this Friday.