So last week, I used the weekly options for the SPY to construct a few calendar trades. As I expected the time premium in the "front week" vanished very quickly as we headed into the holiday weekend and into the last day to expiration. The theta or time decay was really cool to see. But something that I had not expected to happen was how fast the "back week" options lost time value. They lost much more value relative to the front week options than I had anticipated. From what I saw part of the drop which I had expected came from the time decay. But the part I had not anticipated what the huge drop in vol that totally just crushed the profit of the position. For example, at about $102 the position was suppose to make about $1,000 at initiation, by the end of the day on the front week expiration that profit shrunk to $100. Anyways I should had closed that position out on Friday instead of rolling it, but lessened learned and I will move on.
With that said, today I am initiated a short strangle trade for July '10 expiry. I am selling 3 101/107 strangles @ $1.50:
My break evens on this trade are 99.50 and 108.50. Maximum profit is realized between 101 and 107. Here is what it looks like on the chart:
I have highlighted the area of profitability on the chart above. Also take note of where July expiry is in relation to the price range. I have about $4.5 points of cushion on either side.
Here is a shot of the greeks at initiation:
I am relatively delta flat and have positive theta. My gamma is a little large, but I expect that the SPY will not move too much between now and next week so the closer we move to expiration this should start to shrink a bit. I will re-evaluate the market at the extreme end of either side of this strangle and possible trade around the position. Currently my soft stops are at 99 and 109 on the SPY.
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