[Options] This Risk Reversal is So "Meta"
But first, let's set up with this $META chart:
Do you see the similarities? We sure do.
And when we zoom out, this level looks even more significant:
The implied volatility priced into $META options premiums, while off levels heading into recent earnings, is still quite elevated offering us an opportunity to sell naked puts to leverage into a long calls trade. And we can use this trade structure to profit, so long as META doesn't print any new lows from now until the end of the year. So lets make it happen!
Here's the Play:
We're entering a $META December 150/195 Bullish Risk Reversal for an approximately $1.00 credit. We're not so concerned about the actual amount of credit here, but we want to be sure to get *some* kind of credit when we put this trade on.
The credit simply gives us peace of mind that if $META doesn't do what we want it to do, while still maintaining the bottom, that at least we'll walk away with a little something for our efforts.
Here's how the PnL graph for this trade sets up:
Due to the naked short puts, we have to be very careful in managing our risk. Therefore, if $META prints a new closing low ($155.75 or below), that is our signal that we're either early or wrong. Either is no bueno and I'll look to exit the position on the next trading day.
If things materialize in our direction as we hope, then we'll look to close our entire short puts position when we can sell HALF of our long calls to pay for it. For example, I'm in a 2-lot position and we find ourselves in a situation where the calls are priced at $15 per contract and the puts are trading at $7.50, then I'll sell one call and use those proceeds to close two short puts. This then leaves us with only a long call position that we have already have a built-in credit, thanks to the initial credit when we put the trade on today. This means we're guaranteed to win, with the potential for unlimited upside! Sweet!
We call this a #FreeRide and that's the goal with this position.
If we achieve this #FreeRide, then we'll hold the remaining calls position (assuming it doesn't break to new lows) into December (expiration month for these options), and then reevaluate on December 1st. At that point, if the calls are in-the-money ($META is trading above our 195 strike price), then we'll continue holding and trail a mental stop until $META makes a new 3-5 day low. If $META is below our strike price on December 1st, then we'll just exit the position for whatever we can get, as theta will begin to rapidly erode whatever is left. Whatever we get will add to our already built-in profit in this trade.
If you have any questions on this trade, please send them here.
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