One of my trading resolutions for 2011 was to significantly improve on my option income trading setups. This area of options trading is a particular weakness for me, as I tend to play around on the "gamma knife edge" and I like to hold onto positions much longer than needed when it comes to non-directional trades.
So here's a trade I was looking at in CAT. They've got earnings out of the way and just completed the $100 roll, so I'm expecting some chop and consolidation around these levels. So how does one structure risk here?
Well, I was looking at 100 call calendars, but after asking Seth Freudberg at SMB, he suggested a March 90/100/110 call butterfly instead due to volatility skew issues.
So we're going to papertrade and blog it.
The Trade Setup
Here's the risk profile:
Here's the risk management strategy:
If 20% of the debit is realized, close the trade for a profit.
If 10% of the debit is a loss, roll the closest side out to a condor.
If the stock tags 95 or 105, roll closest side out to a condor.
Buy a put/call as a delta hedge when necesary.
Let's see how it works out!