After many requests for specifics on entries/exits and my thoughts on the weekly option Apple long strangle plays I have been doing, here you go>>>
On Thursday afternoon 30 minutes before the close I decided to open a weekly option strangle on Apple. With its wild action over the past two weeks it was a good bet that weekly option sellers on one side of the weeklies would be hurt with a sharp dramatic move. Selling slightly out of the money weekly options have a terrible risk/reward for the person that is short them. They take on unlimited risk for a small fee.
With Apple around $529 after 2:30 p.m. I purchased 10 contracts of weekly Dec 14 $535 calls for $2,262 and I also purchased 10 contracts of $525 puts for $2,742 I did this a day before they were to expire. I was controlling 1,000 shares of Apple stock in both directions the full upside of Apple stock above $535 and the full downside below $525 for a total of $5,004, each tick after it broke those levels was almost $1,000 in intrinsic value. This sounds bad risking $5,004 in pure time value opened at the close Thursday. The risk is in the time value, how do I deal with it? I buy at the end of day after that days time value is priced out the day before the trade. I only plan to hold for the first hour of trading on Friday morning so my risk is one hour of time value not the full option price, I will press for an additional hour at times for a trend if one develops. Another risk is that the option prices fall if volatility dies down and the Vega valuations are priced out, but that generally takes more than an hour.
Another key is that this strangle was anti-fragile, a sharp move did not hurt me, it made me money, it hurt the sellers. By buying these options my risk was in Theta and Vega the option sellers risk was in delta. I could not be “blown up” with the structure of my trade I was risking a few hundred dollars to make a few thousand. My worst case scenario was losing the little over an hour of theta, vega decreasing, losing money in the bid/ask spread getting in and out, and commission costs. The sellers risk was it running 10-20 points in the sellers option direction. That was a very bad risk/reward and probability bet for both of them regardless if they won or lost. No side of my strangle could be blown up with out the other side going up in value dramatically.
Apple starting free falling in the pre-market and gapped down to $514 at open. I got out as fast as my trading platform would allow me selling my put contracts for $11,737 making $8,995 in profit on the put side and only after the options were held for a combined 25 minutes from Thursday at close to the Friday open. Later in the morning I sold the call side for $187 losing $2,074 on the losing call side. $8,995 profit – $2,074 loss = $6,921 total profit on this play. The key in these plays is the exit, there is no reason to let huge profits run, you take them while they are there and open a new strangle if you want to and bring the risk back to theta and vega. When the strangles become profitable and directional I want to take it back to neutral. (I have included pictures from my trading app from my phone just for verification of this trade).