Here is the risk profile of this interesting trade translated into plain English:
This trade has the potential of making at least $1550 if AGIX stays anywhere above $3.5 a share by April expiration. That's roughly a 25% return relative to the amount of money tied up ($6000 required). I estimate around $70 in entry commissions, and potentially no exit commissions.
This trade also has the max potential of making $4000 if AGIX landed around $5.0 a share by Apr expiration. The probability of this happening is obviously lower than the $1550.
No trade would be complete without discussing the risks. Losses will occur if stock plunged below $2.25. The max risk is around $3500 IF the stock went to $0 (and u did nothing whatsoever).
The implied volatility (uncertainty premium, due to news pending) for the options are absolutely fat. Here are the exact details for the trade:
Sell to open qty 25 of the April 5 strike put options
Buy to open qty 10 of the April 7.5 strike put options
Not too bad is it? Lets break down the above two transactions another way:
step 1. Sell to open qty 10 of the April 5 strike puts
step 2. Buy to open qty 10 of the April 7.5 strike puts
(step 1 and 2 basically make up plain jane vertical spreads)
step 3. Sell to open an additional 15 of the April 5 strike puts.
Now, what I just described with all the above, can be summarized with the risk graph below.
Would you do this trade? (click picture to see larger version)
Here is another variation. Here we have a potential of 170% return.
Total capital required to do this trade is only a whopping $450 (to make $800!!!)
The only difference here is to add qty 15 of the April 2.5 strike puts to cap the max risk on the downside.
Would you do this trade?
Trading options may involve significant risk of capital. Trades posted here should be considered for informational or entertainment purposes only and not actual trading advise. Please consult your licensed broker or advisor b4 placing any trades.
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