Stock: UAL United Airlines (Market Price: $53.50)
Volatility @ Sell: 49.83% Volatility @ Buy: 42.00% Volatility Contraction or "Crush": 7.83% Expected Move: Midpoint of BidAsk Spread of Selling ATM Call: $.93 Midpoint of BidAsk Spread of Selling ATM Put: $1.40 Sum: $.93+$1.40= $2.33= Expected Move of stock's price 1. Sold call @ ATM Strike of $53.50 for premium of $.93 (To break even, the stock must not cross $53.50 + $.93. To profit, the stock must be below the break even price) 2. Sold put @ ATM Strike of $53.50 for premium of $1.40 (To break even, the stock must not go below $53.50$1.40. To profit, the stock must be above the break even price) 3. Combined Both transactions were sold at ATM (atthemoney, or equal to current market price) strike prices. The premiums sold were the midpoints of the respective option's bidask spread. In order to profit, with the combined transaction, the stock's price must be above below the #1's break even price and above #2's break even price. This means I must be within +$.93 or $1.40 of the ATM strike/current price. The total range of movement allotted for me to profit is $2.33. As stated above, and not coincidentally, the expected move of a stock is determined by the sum of the midpoints between the bidask spread (midprice fills) for selling ATM calls and put, or $2.33. The sum of the premiums (the midpoints) is the expected move and the range that I want to be in in order to profit!
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NishaNinteen yearold trader, future connoisseur of options. Follow me on Twitter!
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