Investing With Options header image ≡ Menu

Just Released: Get Your FREE Iron Condor Trading Toolkit

Click Here to Download

Example Income Trade in CAT

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!

by Steven Place

Steven Place is the founder and head trader at