August 28, 2017
3 minutes read
As the following graph shows, the price of shares in Dollarama Inc. have just created a brief trough at $118.81 after having peaked at $132.34 in June 2017. Recently the stock has stayed within this range, closing at $123.80 on August 22, 2017. Over the next few weeks, $125 may act as a resistance level and $120 may be a support level. If this proves to be the case, we can take advantage of the time decay on options by setting up a bear spread, using call options with the strikes of $125 and $130, and by establishing a bull spread, using put options with strikes of $115 and $120. This creates what is known as a mixed long condor spread.
Establishing the Mixed Long Condor Spread
Table Comparing Writing Covered Call Options with Holding Long-Term Options,
and with Holding Shares
Profit and Loss Diagram upon Expiration of the Mixed Long Condor
To take advantage of the time value decay, we have written call options at $125 and put options at $120, for a credit of $610 per contract. But since writing options exposes us to potentially large losses should the stock price move against us, we have decided to protect ourselves against this eventuality by buying call options at $130 and put options at $115, for a debit of $305. As a result, our total credit is $305 ($610 – $305) and, as we can see in the above graph, this credit represents our maximum profit of $305 per contract if shares in DOL close between the strikes of $120 and $125 when the contracts expire on October 20, 2017. This position will be profitable as long as the price of DOL stays within the breakeven prices of $116.95 and $128.05. It will generate a loss if DOL moves outside these breakeven prices, producing a maximum loss of $195 if DOL closes below the $115 strike or above the $130 strike when the contracts expire on October 20, 2017.
The mixed condor strategy is used when we expect that prices will remain relatively stable until expiration or that they will not move much beyond the two breakeven prices. So if prices start to move beyond these thresholds, it is best to recognize that a mistake has been made and respond, by simply closing the position. The decision of whether or not to act is up to investors, who must consider their degree of risk aversion and the size of this position within their portfolio. The larger this position is within the portfolio, the more investors will need to be ready to act and close the position if the stock price takes a turn against them.
Good luck with your trading, and have a good week!
The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.
Monetis Financial Corporation
Martin Noël earned an MBA in Financial Services from UQÀM in 2003. That same year, he was awarded the Fellow of the Institute of Canadian Bankers and a Silver Medal for his remarkable efforts in the Professional Banking Program. Martin began his career in the derivatives field in 1983 as an options market maker for options, on the floor at the Montréal Exchange and for various brokerage firms. He later worked as an options specialist and then went on to become an independent trader. In 1996, Mr. Noël joined the Montréal Exchange as the options market manager, a role that saw him contributing to the development of the Canadian options market. In 2001, he helped found the Montréal Exchange’s Derivatives Institute, where he acted as an educational advisor. Since 2005, Martin has been an instructor at UQÀM, teaching a graduate course on derivatives. Since May 2009, he has dedicated himself full-time to his position as the president of CORPORATION FINANCIÈRE MONÉTIS, a professional trading and financial communications firm. Martin regularly assists with issues related to options at the Montréal Exchange.