diagonal senerio

Discussion in 'Options' started by droid17, May 15, 2010.

  1. droid17


    Hi all :)

    I am wondering if this strategy sounds decent more in a general context vs the specific example.

    a few weeks ago I bought some far out (JAN11) ITM(5$ )DRYS calls @ about ~1.40. At the time I felt medium term bullish. With the whole Gulf incident I think it is going to put a damper on medium term spike and I feel it is going to trade pretty sideways with the overall market. I am still long term bullish, but in the meantime I am thinking of selling SEPT 7$ calls against my JAN11 ones. These now are going for ~.32, but I am hoping to sell them next week closer to .40.

    My thought process is premiums are nice now collect some as I wait and if it does spike by SEPT over 7 I still make ~1$. Otherwise I keep the .40.



  2. Well, yes and no. When DRYS spikes will determine the profit.

    Loose estimation: If it spikes to 7 soon, the Sep call will have significant time premium remaining and that will cut the gain to maybe 60-70 cts, give or take. If 7 at Sep expiration, gain might be a bit larger than $1 - eg. delta of '11 call x [seven strike minus current price] which assumes time decays offset.
  3. white17


    If I were in your shoes and you are still long term bullish, I would prefer to sell a Put credit spread. Take in premium rather than lay it out. The worst result could be owning the shares at a much lower cost than today's or january '11, while doing so at someone else's expense.

    You choose your risk level by the strikes in the spread.
  4. droid17


    Thanks guys,

    spin do you think that overall it is a decent move, giving a short to medium term netural bias?

    white, I like the idea of the selling the put spread, but I already own shares also and don't want to grab more. Also it will tie up more cash.


  5. If you're comfortable with the P&L of the position then it's a decent move.

    If DRYS moves up to 7 in a coupla months, consider rolling your diagonal up and out, booking profits and reducing the risk of a down move (or selling off some profitable shares).
  6. droid17


    yes, ultimately I want to move my Jan11 calls out to Jan12