This is a wild trade...my trading mentor on Insane Money turned me onto this new trade strategy.
Here's the best way it can be described:
"Posted on January 24th, 2008 by Mojo (Insane money)
OK, volatility is high, I’m still bearish on the market and I’m looking for some larger returns. I would like to setup a trade on the RUT where I can be bearish, with a little room for bullishness, and put theta and vega on my side.
WARNING: This is an advanced trade. Limit yourself to no more than 1% and only take this trade if you are a wildly profitable and consistent options trader (and if you are please send me an email!)."
Here's what I did...It starts out with a butterfly like this (Insane Money states "With a butterfly, you have time and volatility decay on your side. You also have a large upside."):
Buy 6 Feb 670 Calls
Sell 12 Feb 690 Calls ATM
Buy 6 Feb 710 Calls
however, we added a bear call spread because we thought it was more likely to head downward...
Sell 6 Feb 710 Calls
Buy 6 Feb 730 Calls
So when you actually place the trade, this is what the order looks like because if you notice, the Feb 710 Calls cancel each other out.
Bought 6 Feb 670 Calls
Sold 12 Feb 690 Calls
Bought 6 Feb 730 Calls All for a total credit of $5.55
I was looking at this trade the night before with my mentor expecting to get a credit near $3.70 however, I placed the trade GTC that night and it got filled the next morning at open right when the stock gapped up, so I made a killer credit of 5.55! NICE!
So, if the stock is at 690 at expiration in Feb, I make the most profit, however it lands within the range of 690 plus or minus my debit from the original butterfly, I will be at breakeven. This is a high risk, low probability trade so I am trying this out to see what happens.
So in the end I make a $5.55 credit on a risk of $14.45 ($20 diff between 670 & 690 Call - credit)
