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Joe, you’re right. Buying options so close to options expiration is risky. The July 75 -95 Strangle was just an example. A strangle with a longer time frame would work better.

The point is that you can use strangles to profit when you sense there may be some drastic price movements, but you’re not sure which way the stock will go.

but remember the market makers are going to try to make those options expire worthless so don't expect any sudden large moves in either direction.

An alternative way to play ICE would be an options strangle - - buying slightly out of the money call and put options with the same expiration date.

This is a trade that can make you money if the price of the underlying stock moves drastically in either direction. The maximum risk is the amount you pay for the options contracts.

Call and Put options give you the right but not the obligation to buy an underlying stock at a specified price within a specified time frame.

You profit from call options when the price of the underlying stock increases while you profit from put options when the price of the underlying stock decreases.

As an example, let's look at the ICE July 75-95 Strangle.

In this scenario, you would buy ICE July 75 Put options and ICE July 95 Call options, both of which expire this friday on July 17, 2009.

*note, 75 is the strike price for the puts and 95 is the strike price for the calls.

If you were to buy the strangle today, the ICE July 95 call options would cost $60 ($0.60 x 100).

The ICE Aug 75 put option would cost you $15 ( $0.15 x 100).

*note that options contracts are bought in increments of 100.

The cost of this strangle would be $60+$15 = $75 per contract

Buying options close to expiratoin is risky b/c the contracts would expire worthless if ICE remains in the $75-$95 range when it expires on July 17. ( So $75 per contract is your maximum risk).

So let's say there is a dead cat bounce sometime this week and ICE jumps to $100.00.

The ICE July 75 puts will be worthless on expiration, but the ICE July 95 Calls will have an intrinsic value of $500.

To find an option's intrinsic value, subtract its exercise price from the underlying stock's current price, and multiply by 100 -- in this case: $100 - $95 = $5 intrinsic value per share; $5 x 100 = $500 per contract.

Subtracting the initial cost of the strangle ($75), the profit from the ICE July 75-95 Strangle comes to $425 per contract.

Consequently, if the price of ICE were to plummet to $70, the ICE July 95 call options would be worthless on expiratoin, but your ICE July 75 put options would also have an intrinsic value of $500. Meaning your profit is still $425 per contract as well.

If you're anticapting any near term price volatility in ICE based on your Techincal Analysis then an Options Strangle would allow you to profit whether the stock goes up or down.

The ICE July 75-95 Strangle is just one example and it carries it's own risks. The key is finding the right strangle with the right time frame for the risk/reward that suits your trading style.

Thanks for such a nice educational comment about options.

I guess how limited any upward move in ICE is will be directly proportional to the news flow or lack thereof. One press release discounting last weeks news could easily send the stock up 15 points in a day. But since no one can predict when, what or if news will come I think the better trade is to find a better setup. That said, the easy money shorting has already been made, and getting long at the right time for a bounce will pay off quick. But, getting invovled here isn't trading it's gambling.

I personally don't like the risk/reward of either side so there's no way I'm getting invovled, but it is fun to watch.
.-= traderx´s last blog ..Week ending 7-10 =-.

I agree that it is risky in either direction. But I will be looking for a short entry if it bounces like a dead cat.

I don't think the moves in POT, MOS or ICE are too hard to understand.

POT and MOS are strictly inflation plays and they rise and fall depending on whether the inflation or deflation trade is in vogue.

The move in ICE on the other hand was strictly driven by the news regarding the trading of oil futures.

Big downward moves on extreme volume are usually an indication of capitulation. At this point one needs to ask themselves is there anyone who wants out of ICE that hasn't sold yet? I wouldn't touch it with a 10ft pole, but with a gun to my head I'd bet there's more money to be made on the long side of this trade. It just depends how serious they are about regulating OIl futures I suppose. Either way though getting involved in ICE is high risk to say the least, but given the fall the biggest risk is clearly on the short side. One press release and the shorts are in a world of hurt. IMO, train wrecks like this are better as spectator sports than trades.

Happy trading this week.
.-= traderx´s last blog ..Week ending 7-10 =-.

There are always news behind a stock's sudden moves. We traders can never know when and what news will come out. So one need to take all the signals that a system feeds us. However, if one's system is not good enough then he/she might be whip sawed to death in doing so

The difference between a good system and a bad system is that a good one can filter out fake signals more effectively.

Here is the dilemma for trading ICE, should one chase it(short)? Or should one play a dead cat bounce(long). Both are equally risky. ICE's mid/long term upside is quite limited after such a big drop if you ask me. So a safer move is to short into a dead bounce on weakness. If it continues to edge lower, then we do not touch it