Trade 1: selling Nov 15th 9.00 put @4.30
Trade 2: buying Jan 17th 10.00 put @5.60
So it's a net debit trade of $1.30, but the strike price on the put I'd own is an extra dollar.
The ideal outcome is that the earnings report in November doesn't affect price too much (or price goes down a bit), so the put I sold expires worthless, gets exercised, or I close it early when theta value is nearly 0, while the put I bought has another 2 months of Theta available, and I can just sell to close (ideally for around $3, as that seems to be what 2 months of Theta gets you with this stock, judging by the price of October 18 puts).
The risk is either the stock drops heavily and I'm down 30 cents because I get assigned have to exercise my $10 put, or that the stock shoots up so high that both puts become essentially equally worthless and I can't recover any of my net debit by selling to close my 10 put.
Fidelity analyzes the probability of profit at >99%.
Am I missing something?
Side note, am I missing something on just selling CSP on this stock? It's at $8.45 and, as you can see, a Nov 15 put at $9 is $4.30. That's a lot of IV on a stock that shouldn't realistically be expected to move too much just because of a poor earnings report. The company has multiple drugs currently in trial, one in phase 3 and another in phase 1. Even if news comes out that the phase 3 drug study was an abject failure, the phase 1 drug still shows promise and (since that experiment is still in participant gathering) no news is coming from that study for at least 3 months. What am I missing?
Am I missing something on FULC diagonal put spread?
byu/D-Shap inoptions
Posted by D-Shap
3 Comments
That’s a pretty aggressive diagonal spread. FULC is definitely volatile, and while the probability of profit might look good on paper, a lot can happen in 2 months.
Have you considered selling covered calls instead? It might be a less capital-intensive way to play FULC’s volatility. Check out resources like [Investopedia](https://www.investopedia.com/options-basics-tutorial-4583012) to learn more about options trading or explore the Prospero free investing newsletter, which provides AI-driven insights on potentially lucrative stock picks, including options trading strategies.
Just remember, options trading can be risky, so start small and understand what you’re getting into.
FYI, I entered your trade into ibkr.
And it’s showing a prob of profit of 49% to 55% (changes every time I look at it from market implied)
Fidelity is probably pricing that the Jan option will not be affected by any IV crush in November which isn’t true and that you can sell it for a lot more than you would be able to. I don’t know anything about the stock news that you expect in November but if some reports come out then, the Jan option will get affected more.