Following the markets leads to many exciting events where we can 'take a bet' on a direction of a stock. This can be by a take-over attempt, big product launch, macro trends, key hires, etc. The financial news outlets are full of them.
As options traders, we can find better ways to express our views on those events. Better means that we can get a better risk-reward ratio compared to buying/shorting the stock. Usually, it comes at the expense of timing. But as traders and as an event trade, we don't plan to hold the stock forever anyway.
- Expressing the event with long call options allows us to have unlimited upside but limited downside. So if we are wrong, we have a built-in stop-loss.
- Trading spreads can give us leverage and a better risk-reward ratio.
- Selling options allows us to have limited profit buy higher probability of profit (much higher than the 'math' of the options would imply)
- And more.
On April 14th, Elon Musk announced that he was interested in taking Twitter ($TWTR) private by buying all outstanding shares for $54.2 per share. He said that this was his 'final offer'.
By entering the data: (Ticker: TWTR; Price above 54.2; on date 2022-05-13 (one month from now), We can quickly get several options trades to consider.
We can see that the stock will return 18.57%, and we have linear risk if the deal falls through.
However, by buying a long call, we can increase our leverage, and the return will be 108% if the scenario happens. Our risk is only $537(12% compared to buying 100 shares).
We can even increase the leverage more if we buy or sell bullish spreads. Returns will be 207% for a call spread where we will risk only $32.5 to make $67.5. We can increase quantity according to our risk appetite.
To recap: In a few minutes, we found a better way to trade a real-time event in the market. This alone can pay the price of the platform tenfolds. But we can do better:
The risk slider
The scenario tool has a risk slider that optimizes the strategies and allows you to decide if you want more profit or a higher probability of profit.
In our Twitter case, I would want to make the trade as aggressive as possible, as I see this event as binary, and if it doesn't happen, the entire thesis should change.
When looking at the aggressive trades, I can see that the Long call return increases to 114%, and the risk decreases to 382$ (8%). The real value comes from seeing that due to options prices, it is better to sell an ITM bull put spread (55/52) and risk $40 to make 180$ if the events happen (450% return). If I had to do it manually, I wouldn't have checked it.
Our Scenario tool allows you to quickly react to market events and find the best way to express your views on a specific trade. It leverages the technology to check all possible combinations rapidly and presents the optimal one for the scenario you've given.
This Twitter example shows how we can trade options instead of stock and have limited risk and more profit if the event happens.
- Go to the Scenario tool here.
- Go to the Scenario help article.
- Signup for Option Samurai
- See all our capabilities here