Pre-Report Put Options Strategy

Published on: 11:01AM Jan 06, 2010
The following is an aggressive protection position in options to use going into the January 12 supply/demand report from Bob Utterback of Utterback Marketing. "It is assumed the weaker basis and cash markets will pull down the March futures by expiration," he explains. "The downside target is the $3.80 price range."
Buy Feb Serial puts              Days to expiration: 16                        Expiration date: January 22
 
Advantage: limited time value and positions can be allowed to be assigned a futures position if a bearish trend is in effect between January 22 and March futures’ expiration.
Disadvantage: Must be right very quickly. Only deep-in-the-money puts will limit time value decay cost.
Option 1: Straight purchase of long Feb puts. Current futures: $4.186
Feb Serial Put
$4.10
$4.20
$4.30
$4.50
Premium Cost
8.5
13.4
19.4
34.6
Slippage
1.0
1.0
1.0
1.0
Total Cost
    9.5
       14.4
       20.4
       35.6
Time Value Cost
    9.5
       12.6
        11.4
          4.3
Cost/Day
     .60
        .79
           .71
       .26
Break Even
$4.005
$4.056
$4.096
$4.144
Delta
.3760
.5002
.6191
.8043
 
 
"Notice, the deeper one goes in-the-money, the better the breakeven price becomes and the greater the premium risk that has to be taken," says Utterback. "I believe the $4.30 put is the best compromise of low time value cost and high delta (price variability)."