Two Trades for April 13, 2015

Today I entered two new trades, a credit put spread in SPX and an earnings trades in Johnson & Johnson (JNJ). In the Weekend Portfolio Analysis I indicated that I would be looking at several earnings trades this week. JNJ reports earnings before the bell tomorrow morning and offered favorable risk/reward potential.

Trade Details:

SELL 1 JNJ Apr 15 100 Call @ 1.56
BUY 1 JNJ Apr 15 105 Call @ 0.09
SELL 1 JNJ Apr 15 100 Put @ .86
SELL 1 JNJ Apr 15 95 Put @ 0.08
Credit: 2.25 ($225 per contract)
Days to Expiration: 4

I chose to sell the iron condor instead of straddle for this trade because the iron condor offered much more efficient use of capital. With the iron condor (or iron butterfly) the maximum risk if $500 (width of the strikes) less the credit received ($225) for a total capital requirement of $275 (maximum loss). On the other hand, the straddle only offered an additional $17 in premium and it required over $2,000 in buying power. That made the iron butterfly a no-brainer. JNJ has an expected move of under $2.00 for this earnings cycle and historically has not made huge moves after earnings are announced. If that proves to be the case this time, then I should have an opportunity to close the position tomorrow at a profit once the volatility contraction occurs. The risk graph is shown below: Analyze_JNJ_041315 The premium collected exceeds the expected move so the trade will, at minimum, break even as long as JNJ stays between $97.75 and $102.25. The second trade was placed after the closing bell this afternoon:

Followers of this blog know that I have been selling weekly credit spreads in the SPX on a fairly consistent basis. A little over a month ago, I had one of the weekly SPX trades go against me as detailed in the post, SPX Trading Blunders. After further analysis of that series of trading errors, I decided that when I have concerns about a downturn, I won’t do an inter-week credit put spread. Rather, I will extend the duration out by a few weeks. This allows me to get the strikes much farther below the market and gives me additional time if there are one or two days of declines. With the frequent number of distribution days that I have observed recently, I felt that I needed to allow myself some additional duration in this week’s SPX trade. The plan is to close the trade when it reaches 50% of its potential profit. I hope to not have to carry the trade over the weekend. Time will tell.

Trade Details:

SELL 1 SPX May2 15 1935 Put @ 2.48
BUY 1 SPX May2 15 1910 Put @ 1.78
Credit: 0.70 ($70 per contract)
Days to Expiration: 25

After hitting it’s high today of 2107.65 around 10:30am, the SPX steadily declined the rest of the day right up to the close of the market. SPX options trade for 15 minutes after the close of the market. It was at this point that I placed the trade to sell the vertical spread. With the SPX now at 2092.43, I have over 150 points of leeway on this trade. If the market experiences a 30 or 40 point sell-off for a day or two this week, I have time to wait for the market to recover allowing me to still exit the trade profitably, which would not be the case had I sold the weekly options that expire this Friday.