Options Strategy Drawbacks?

minmike · Dec 11, 2009

Quote from rmarvin001:

I have been trading options for the last two years and have recently started employing a reverse diagonal spread strategy in sim mode. In my virtual trading, I have been quite successful and am thinking of employing it live. What are the drawbacks of this strategy.

An example for all to comment on follows:

XYZ Current Share Price: $100

Buy 500 Jan $130 Calls @ $0.82
Implied Vol: 57.5

Sell 500 March $155 Calls @ $0.86
Implied Vol: 52.6

Typical Volatility is low 40's,upper 30's. Earnings are to be announced in December.

The trade (excluding commissions) nets an initial credit of $2,000. ($43,000 versus -$41,000)

It appears that there is limited downside risk and incredible upside benefit, especially with a blowout earnings report. If you were to have an exit date of between 12/24 and end of the month, it is hard to see how you could lose much, especially when considering the upside potential.

Thoughts?
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You have it backwards. tons of risk with little reward. Have you run if nothing changes, (vol/stock price) how much you will lose at expiration on this position?

5xBEAR · Dec 11, 2009

Quote from noob_trad3r:

Why not do what I do. I sell puts on GE and SPY

and if I get assigned then I sell calls on them.

I keep it pretty simple.
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That's ok... but for most individuals, the margin requirements are pretty hefty on naked positions.

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Options Strategy Drawbacks?

minmike

5xBEAR