Options Trade #30 - C (Citigroup) Short Put "Wheel of Fun"

Updated: May 2, 2019

VTS Community,

So the excitement continues, wow.  After a truly spectacular decline of -20% on the S&P 500, we had a big up day there to keep everybody guessing.  It's one of those things where some people will view it as the classic "bear market bounce" where it just signals a very unhealthy and desperate market that is about to go lower again.  Others will see it as the "all clear sign" that the worst of it is over and all time highs are coming.  Which do you think it is?

For me, I'm just going to keep my head down and stick to the process.  My indicators are all still mostly in the middle ground.  Not nearly good enough to go long the market here, but also not quite bad enough to fully short it with conviction either.  Safety and risk management is what's required during these uncertain times.   

I can't tell anybody what to do of course, everyone makes their own decisions.  But just as a general suggestion, I don't think it's a good idea to be changing positions with the whims of a broken market.  We could still easily see wild swings in either direction and I can easily imagine either happening right now.  If we were at all time highs in March or April, I wouldn't be shocked.  On the flip side, if we dropped another 20% by then, it wouldn't surprise me one bit either.

As I mentioned yesterday, one of my go to trades when markets are really beaten down is the Wheel of Fun.  It allows for strategic longs to be taken with some margin for error on the downside.

Click here for the Wheel of Fun video explanation

The Trade: 

"Wheel of Fun" Short Put on C  (Citigroup)

Sell to Open 1 x 18 Jan 19' C 48.00 Put Credit:  ~ 1.35 Days to expiry:  22

* prices move around, so just get the highest premium you can. 

Margin Requirement: -  I always trade these "cash-secured" meaning I reserve the full capital required to own the shares outright if assigned

-  1 option contract  =  100 shares if assigned -  100 shares of C @ 48.00  =  4,800 -  This trade requires 4,800 per contract

-  The VTS Discretionary model portfolio is at 26,365.36 -  4,800 is 18.21% of the portfolio

* You can scale your trade to roughly 20% of your VTS Discretionary funds

Stop-loss: -  I always use a 10% stop-loss on this type of trade -  4,800 per contract is what the trade is valued at -  4,800 * 10%  =  480

* If I'm down more than 480$ per contract I will close it

Citigroup is currently trading at 50.75.  My strike price is 48.00 with a premium of about 1.35, making the break even cost basis around 46.65.  That's a little over 8% below the current price.  So you can see, this trade allows me to take a bullish position while still maintaining a comfortable margin for error to the downside if these markets have further to fall.

And of course, I will honour the 10% stop-loss just in case the market has more than a little bit to fall yet...

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