A Put Backspread Strategy on Thomson Reuter Shares (TRI)
The price of shares in Thomson Reuters (TRI) has begun to fall, after trading in a range of $53 to $55 since mid-August. Breaking through $53 could result in the security testing a level of $50 and, consequently, $48.
Daily Chart for TRI ($52.31, Friday, October 14, 2016)
To benefit from this scenario, we will implement a strategy that allows us to turn a profit if TRI closes below $50 on expiry on November 18, 2016. However, since there are no guarantees in this world (and even fewer in the stock market), the selected strategy will also allow us to benefit if the price climbs to over $54, should this happen.
Reverse Put Backspread
The selected strategy, called the reverse put backspread, consists of writing a put option with a strike price of X and buying two put options, or more, with a strike price of Y, where Y is lower than X.
Position
- Writing 10 put options, TRI 161118 P 54, at $2.41
- Credit of $2,410
- Buying 20 put options, TRI 161118 P 52, at $1.04
- Debit of $2,080
- Total credit of $330
Profit and Loss Profile
As you can see in the above graph, we are well positioned to take a profit if the price of TRI drops below the lower breakeven price of $50.33 or if it rises above the higher breakeven price of $53.67.
However, we will incur a loss if the price of TRI stays between these two breakeven prices. This loss can be as much as $1,607 if TRI closes exactly on the $52 strike upon expiry on November 18, 2016.
Consequently, since we do not want to risk incurring the maximum loss, we will close the position in three weeks if TRI is still between the two breakeven prices.
We are also considering taking our profits if TRI falls to between $48 and $49.
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 options strategies.
President
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.
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