Stock Symbol: [private_monthly]MOT[/private_monthly]
Price at time of Trade: $7.68
Target Price: $9.00 by Oct expiration
Option Strategy: combo (short put / long call)
Risk: low / medium
Reward: unlimited
Reasoning:Expect that [private_monthly]MOT [/private_monthly] will move up to at least $9.00 by October expiration. Because we're selling the put option, our break even is at just $7.70, requiring only a 1/4 of a percent move up. Also, this is a stock we'd love to own here but we'd like it even more at $7.00 (down 9%), which is what we'll have to do if this stock closes under $7.00 on October 15th.
Max Risk: $770
Max Rewward: unlimied
Profit at $9 target: $130 = 16.88% gain
Trade Details:[private_monthly]
Buy 1 MOT OCT10 7 CALL $0.87 $87.00
Sell -1 MOT OCT10 7 PUT $0.17 ($17.00)
Requirements
Cost/Proceeds $70.00
Option Requirement $700.00
Total Requirements $770.00
Estimated Commission $25.90
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Chart:[private_monthly]
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Can you explain the $700 option requirement?
Unlike a spread trade, a combo trade or risk reversal trade involves the sale of a naked put or puts. In this case, we’d be thrilled at the opportunity to purchase this stock for just $7 a share, which is more than 9% less than its current price. But to do a trade like this, you too should absolutely want to own this stock given the opportunity to buy it at $7 a share. If not, just pass on this particular trade. We didn’t enter this trade thinking that this stock would end up lower than $7 by October option expiration, we thought it would move higher than when we entered the trade. But, just in case we’re really wrong, we’re more than happy to own it at such a discount. So, as the downside of the trade is that we’ll have to purchase the stock at $7 per share, and because we sold 1 put contract (each contract controls 100 shares of stock), our broker is going to make sure we’re good for the $700 should the stock close below $7 on October 15th.
Thanks for the explanation