OPTIONS
Adjusting With Options
Adjusting A Long Call With The Synthetic Straddle
by Chris Tyler
In this, the second and concluding part of this series,
we focus on applying money management with the use of adjustments.
IN the January 2007 STOCKS & COMMODITIES,
we began a case study of XM Satellite (XMSR) using a double bottom/Fibonacci
butterfly chart pattern along with a multiple time frame analysis. In part
1, the reader was introduced to the characteristics of the Fibonacci-based
butterfly pattern, the application of confirmation patterns, multiple time
frame analysis, and candlestick entries. After reading that article, readers
should have felt more confident about the trading process through the use
of popular technical tools and methods.
The purpose of that article was to help traders turn an uncertain situation
into a stronger, well-conceived alternative. This was accomplished by locating
a limited risk position in the option market that satisfies our trade objectives
better than the underlying instrument itself. We did so by focusing on
how a trader might select a proper long call purchase based on the technical
evidence, trade expectations, and the actual pricing of the call options.
Part 1 of the case study left off with the reasons behind the purchase
of XMSR May 22.50 call options for $1 as our bullish technical setup was
just under way (point 2 of Figure 1). In part 2, we shift the focus to
applying money management through the use of adjustments.
FIGURE 1: XMSR, DAILY VIEW, 4/7/06. On this chart of XMSR
you can see the adjustment zone.
SYNTHETIC STRADDLE
While there are many alternatives, for the moment we will examine the
synthetic straddle. We will show the risk characteristics behind the strategy
and walk the reader through one possible series of easy-to-understand adjustments.
The approach and its adjustments will continue to make good use of a blend
of practical money management and technical analysis, remaining consistent
with our philosophy from the first installment. Traders should come away
with an understanding of how this position might stack up versus more traditional
money management. In addition, it might help answer whether this type of
limited risk trade is suitable for you.
...Continued in the August issue of Technical Analysis of STOCKS
& COMMODITIES
Excerpted from an article originally published in the August 2007
issue of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2007, Technical Analysis, Inc.
Return to August 2007 Contents
