Monday, June 7, 2010

Diagonal in SPY using weekly options


Before I put this trade on I only have the 114/110 July '10 put spreads. So I feel like I am covered to the downside. I wanted to add a play that was neutral to slightly bullish, in case the market finally finds a bottom and catches a bid. But I wanted two conditions met. First is I wanted very little risk to the downside as this would eat into my profits from the put spreads that I own and second is that I wanted a wide range of profitability with some cushion beyond the current range of about 105-111 or about 60 handles on the /ES futures.

Lets break down the trade. I bought 5 110/111 call diagonals for a debit of $0.09. I sold the Jun2 '10 110 weekly options that expire this Friday and bought the front month 111 call options. This gives me a profitability zone of 104.64-112.28 by Friday expiration for the weekly short calls. My max profit is around 110 on the spy which would yield a profit of about $530 bucks. My maximum loss which would not occur until about 119 on the SPY would be about $545 on the upside. As I do not see this market taking off in a big way between now and Friday I am comfortable with this risk. In all reality I am looking at making about $200 on this trade.

The weekly options should decay quickly or quicker than the front month options that I bought. I would stop out of this position between 112.3-113 on the spy. I accept full risk to the downside of $45.

9 comments:

  1. Today was yet another accomplishment. I finally was able to structure a trade in the time frame that seems to yield the best results for my trading style. More often then not I go out to far in the future when in reality I never really want to hold it that long.

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  2. With as fast as things are moving I see no reason to do anything other than front month contracts.

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  3. I am really becoming fond of the SPY as a trading vehicle for several reasons:

    1) Very liquid

    2) $1 strikes

    3) .01 to .03 wide spreads more often then not.

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  4. I just got around to analyzing this trade, I have to say this is one of the best ideas I've seen in a while. I would probably even be willing to alter it a bit and do a ratio spread and make it $0 out of pocket or even a small credit. I just don't see the S&P going over 1120 by Friday. I haven't ever used or even looked at weekly options before. I remember reading about them a while back but that was it. This is basically a mini calendar spread, you speed up the expiration time using weekly options. I really like this.

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  5. With the regular expiration schedule along with the weeklies and the quarterlies, you can literally trade an expiration week every week in the SPY.

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  6. Weeklies become even more attractive for short-term trading during times like these. I don't feel comfortable doing a typical one-month four week position. Days are like weeks right now as far as market sentiment and price action movements.

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  7. Another trade that I looked at on Friday of last week was the selling the weekly strangle of 104/110. On Friday afternoon it was fetching about $1.90 and by today's close it was only fetching $0.69. This would had given you a profitability zone of 102.10 to 111.89.

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  8. On Friday of last week I highly doubt I would have had the balls to sell a naked put on SPY. I maybe would have sold the put spread, and sold 2 calls for every one put spread, something like that. I have to say that last week felt great to watch it slide 3.5% in a day and I felt no panic. I like being in mostly cash and making short term structured risk/reward trades.

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  9. Yeah I was in the same boat. But when I was looking at it I was looking to add a few 101 puts to protect the downside. All in all I liked the risk reward of the diagonal much more.

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