I've been working on my own strategy for some time and came up with the following: E.g. Underlying is ICE at ~142.67 Long 100 shares at the market. STO March 145 Call at bid for 7.7 credit BTO Feb 135 Put at ask for 2.65 debit If it tanks below 135 before Feb put expiration, I would close with max loss 135-142.67-2.65+the current value of the call = approx -3.0 loss If the Feb put expire worthless, I would roll up the call and put to the next month and collect the difference in premium of the call. If it rallies at any point above 145, the max profit would be (if assigned) 145-142.67+7.7-2.65= 7.38 profit pts I would try scalping when possible. Any thoughts on this? I've been studying options for only half a year, so take it all with grain of salt. My main idea is to always hedge the position and make a few hundred a month (on a 30K account).
It's a very good idea for a newbie to explore hedged positions when starting with options. It tends to reduce a learning curve tuition that can be very expensive Your position can be done with fewer legs, synthetically, but since you're new to this, it's probably easier to follow by sticking with your position, as is. I think that you're miscalculating the value of the position at Feb expiration. The loss will be nearly double ($600) at 135 because of the retained time value of the Mar 145c, In order to only lose $300, ICE might have to tank 20+ pts. At 145 at Feb exp, you'd be slightly better than break even. >> If the Feb put expire worthless, I would roll up the call and put to the next month and collect the difference in premium of the call. If it rallies at any point above 145, the max profit would be (if assigned) 145-142.67+7.7-2.65= 7.38 profit pts << If you roll both up, you're not going to be assigned. And in order to make anything near the maximum potential of 7.38 pts, ICE would have to rally BIG time (25-30 pts) to drive the short call toward parity. Not likely. Try to find a modeling program so that you can input the various legs of a strategy that you are considering and obtain a time decay graph of the position over time. A pcture can be worth a 1,000 words
Thanx to you post I just found a good position. Sell bearish put spread Feb 160-170 for 0.55 credit. The chance of ICE going up above 160 in less than 2 weeks is slim. I think it is better than your diagonal spread and incur less commissions.