Profiting From Options Thu 23 Jun 11 | 11:10 PM ET
CNBC Asia with Oriel Morrison
Time Frame: 27 days to 21 July which is the July index expiry date
View: more uncertainties and volatilities to be played out in the market in July – Greece, China, US reporting
Expecting a potential plus and minus 100 range on the S&P/ASX 200 Index (XJO) from the 4500 level now.
Buy July 4250 put for 25 points (which is $250 after a $10 multiplier)
Sell July 4650 call for 27 points ($270 per contract)
for a total credit of $20 per contract (before costs)
How to profit?
1 Profit most if XJO index falls below 4250, where the put option will then be in the money and be very profitably moving 1 for 1 with the put option
2 failing that, with a delta of 0.13 on the put, with other variables (like time and volatility constant), a 100 point drop on the index will give a $130 profit per contract (after receiving $20 to be in the trade!)
Put option bought can be sold to take profit independently anytime during term of options
3 If XJO index stays belo 4650, the call sold will expire worthless and the whole $270 per contract will be earned.
The bet in this strategy is that the Index does not go beyond 4650 in the next 27 days, if it does, the call needs to be bought back to cut loss.