Option Trade: As Markets Tumble, Here’s A Trade With Zero Downside Risk

TL;DR

Learn how to set up a call ratio spread in Roku, an advanced option strategy that offers zero downside risk and potential gains if the stock recovers.

Transcript

[Applause] hey option traders today we're looking at setting up a call ratio spread in roku this is definitely an advanced option strategy so get ready this trade is especially appropriate at this time because it can be constructed with zero downside risk while also allowing for some gains if the stock recovers so let's just get into it take a look... Read More

Key Insights

• 🥳 Advanced option strategy: Setting up a call ratio spread in Roku, allowing for potential gains if the stock recovers.
• ✳️ Zero downside risk: This trade is constructed with no downside risk, as long as the stock stays below $170.
• ✳️ Potential unlimited risk: However, there is potentially unlimited risk associated with this trade, especially in the event of a sharp rally in Roku stock.
• ™️ Not recommended for inexperienced traders: The trade involves a naked call option and is more suitable for experienced traders.
• 🥹 Earnings risk: The trade may face earnings risk if held until expiration, as earnings for Roku are expected in February.
• 🪐 Net credit and profit zone: The trade brings in a net credit of $90, and the profit zone on the upside depends on the stock's movement over time.
• 🤑 Practice with virtual account: Traders new to options should practice with a virtual account before risking real money.

Questions & Answers

Q: What is a call ratio spread and how does it work in Roku?

A call ratio spread is an options strategy involving buying and selling different call options. In this case, one 170 call is bought and two 200 calls are sold. It allows for potential gains if the stock recovers but comes with potential unlimited risk.

Q: Can the trade still be profitable if the stock stays below $170?

Yes, if the stock stays below $170, the 170 call options will expire worthless, but the trader will keep the net credit of $90 generated from selling the 200 calls.

Q: What happens if Roku stock rallies to $190 in the next week?

If Roku rallies to $190 in the next week, the trade would show a loss of around $450. The profit zone on the upside depends on the timing of the stock's rally.

Q: Are there any risks associated with this trade?

Yes, there are risks involved. As the trade involves a naked call option, inexperienced traders may not be able to place this trade. Additionally, there is potential unlimited risk, particularly if Roku stock experiences a sharp rally.

Summary & Key Takeaways

• The video explains how to set up a call ratio spread in Roku, utilizing options contracts that expire in April.

• The strategy involves buying one 170 call and selling two 200 calls, with a net credit of $90.

• While the trade offers a large profit zone on the upside, it also carries potential unlimited risk and is recommended for experienced traders.