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Earn Up To 10% With Lions Gate Entertainment Through June

In just about three weeks, you can earn up to 10% on LGF's options. I am talking about selling June 2016 straddles, which expire just 22 days from now. These options are now expensive due to the fact that the company`s stock is very volatile (it fell from over $40 per share to around $18 per share over the last 52 weeks):

Selling options can be risky which is why I either promote the iron condor strategy or the covered straddle strategy. I ran the numbers on the iron condor strategy and found out it is not worth the risk. Hence, the covered straddle strategy is a much better choice. Here is how the trade looks like:

(Source: optionsprofitcalculator.com)

Essentially, you sell a straddle and buy the stock in 1:1 ratio (i.e. one straddle per one share). Since the minimum size of trade is 100 shares, the trade demands around $1800 (including transaction fees). By selling the straddle, you receive $255 in proceeds. However, since both the put and the call are slightly in-the-money (the stock closed at $19.76 per share today), the maximum return is $179 per trade. This translates into a 9% return over a three-week period (a 37% annualized return!).  

Here is how the risk-return matrix looks like:

(Source: optionsprofitcalculator.com)

At expiration, the break-even price is $18.60, which is about 6% lower than the current market price. This may seem close but the company's stock went below this level only about three days over the last six months. However, I also like to hedge the downside risk. This is why I recommend buying a protective put (or two, if you want to both limit the risk on the stock and the sold put). The $18 put, which is the closest strike below the break-even price, is currently worth about $0.50 apiece. With this put option, your downside risk is limited to $1.21 per share, which is about 6% of the stock's current market price (the option's premium is included in the calculations). 

If you buy one protective put for each at-the-money put you sell, leaving yourself exposed the downside risk on the stock, your maximum return on the above strategy will be about $129 per one option contract (just over 6.5% over the three-week period). Alternatively, if you want to completely hedge your downside, it will cost a few more percentage points of return. In fact, your maximum return, albeit very low-risk, will be only about 4% (just $79 per one contract). Although this looks rather poor, keep in mind that the annualized return with this strategy is over 16%!     

I personally like the strategy, which involves buying only one protective put per each straddle sold. After all, I can always limit my downside exposure in the underlying with a stop-loss order near the break-even price. The stock does not seem to gap wildly, nor does it seem likely to me that it will trade lower than $18 per share (seems like a psychological level) anytime time before the expiration, based on historical data. 

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