For my first demonstration trade for this blog, I decided to use a Facebook Call option that’s deep in the money and expiries in 46 days. I first learned this stock replacement strategy in one of Jim Cramer’s books, but Don Kaufman of TheoTrade also uses a similar trade and calls them Duration Trades.
I use it because an 85 Delta Call option tends to function like being long 85 shares of stock and if we’re lucky, and the underlying runs, my 85 Delta Call can be close to a 100 Delta Call and will act like 100 shares of stock before expiration.
Long 85 Delta Call
I purchased the June 18, 2021 290 CALL (85 Delta Call) for $35.50 on 5/3/21 at about 9:30 am EDT with the underlying at $323.10 and Facebook closed at $323.15.
Short 20 Delta Call expiring this week
Before the market closed today I sold the $330 Call (20 Delta) for $1.04. This should cover my daily theta burn on the trade and will supply some extra income.
At the end of the day, with Facebook unchanged, I lost $22.00 on the trade. I also hold a net delta of 65 and theta of 36.34, so I’m happy.
Estimated Profit/Loss at Expiration
Right now the options market is anticipating a move of +/-$26.90 in Facebook Stock by June 18th, which is 8.3% up or down.
I anticipate selling the weekly option 7 times between now at June 18 for a theoretical gain of $700.
So if Facebook stock moves up to $349.70 at expiration, theoretically I could make as much as $3,120 on a $3,550 investment.
If Facebook moves down I could lose my entire investment but likely I would lose $2,279.
And if the stock doesn’t move, I would likely lose about $402.
Stay tuned for updates.