Friday, November 20, 2009

Nailed It

In the Gaming the Gold Bugs post, we explored using a call ratio spread to exploit a mildly bullish move as well as elevated implied volatility in GLD. Given that today is the last trading day for November options, let's analyze how the ratio spread would have played out.

At trade inception GLD was trading around $107 with implied volatility ($GVZ) spiked up to 26%. We mentioned each volatility spike has been fade able over the past few months. Since then GLD has continued it's surge, rising as high as $113. Volatility has subsided and is currently residing around 24%

Trade Inception:
Long (1) November 109 call @ $1.30
Short (2) November 111 call @ $.78
Short (1) November 113 call @ $.50
Net Credit $.76

[Source: EduTrader]

Based on the expiration risk graph, the maximum profit will be realized if GLD is residing at $111. As long as GLD remains below $113.50, we capture some type of profit. This is where the position stands currently.

November 109 call @ $2.85 (profit = $1.55)
November 111 call @ $.90 (loss = $.12 x 2 = $.24)
November 113 call @ $.03 (gain = $.47)
Net Gain = $1.78

Since we're above $111, one would need to close the trade sometime today to avoid being assigned on the extra naked calls. Although we could say all's well that ends well, truth is GLD was getting a little too bullish when it rallied up to $113 on Wed. Given that these call ratio spreads involve shorting more options than you are buying, there is upside risk you have to worry about if the stock rallies too far. Consequently, you must remain ever vigilant in monitoring the position and managing risk.

1 comment:


Another excellent way to look into the market.