On the subject of butterfly conversions, I did one recently, so maybe the numbers from that will be educational for someone. The details below are from memory as my journal is at the office. 3 weeks or so ago, I bought a SEP EW1335C/OCT 1350C diagonal for (0.75) debit. ES climbed rapidly afterward and I was concerned about the 1335 short. With the ES at about 1330, I was considering these two choices: 1) Close the spread for an additional (1.25) debit, making a total loss for the trade of (2.00) 2) BTC the 1335 short, STO 2 OCT1355C, BTO 1 OCT 1360C. This could be done for a total debit of (1.30) per butterfly. It still represents a total trade loss of (2.05) per original diagonal. The odds of the fly paying off are low. But the cost of this little lottery ticket was the same as simply closing the original trade, plus some extra commish (b/a spreads are included in the above prices). Why not take the free butterfly? And don't worry Mav...I only used half my home's mortgage on this trade ;-)
I guess it's true what they say, people believe what they want to believe. I never asked Phil to get emotional. I never asked Phil to hit the panic button. Are you a fiction writer on the side? LOL. No, my beef with the trade is he is taking an enormous risk. Not in dollar terms, in risk terms! LOL. The guy is taking the same amount of risk for an ATM option as he would take for a DOTM option 100 pts OTM. And no, I'm sorry, I don't see the huge reward here. I question the merit of doubling down every month if you don't get the so-called credit you desire. That is not trading. That is called refusing to accept that you are wrong. No, I do not think Phil is necessarily being stubborn or ignorant of his risks. I am simply asking him to re-think his position. That is all. And it does not matter if he is risking 100 million or $600 as you try to put it, the risk is relative to the reward here and the negative edge he is carrying on the trade. I also am not sure if Phil had the ability to price his position theoretically at expiration given certain price and vol levels. So I jumped in to make sure he understood just how large the debit would be. I am not that worried about Phil, but since this thread is not just about Phil but rather it's being used as an educational platform, I felt it was justified to jump in here and point out to others that you simply can't keep rolling up forever. Phil himself even asked about the merits of such a strategy. So I jumped in and answered. Nobody is questioning or attacking Phil here, I think some here want to make sure they understand the "why" behind the trade. Carry on.
It never hurts to keep remining people, but it's pointless. Newbies think they've discovered a gold mine and they do follow blindly. Mark
They're a poor directional strategy when traded within one sigma. Made worse when traded otm on the call side. I've only bought downside diagonals into a prediction of bear volatility, but prefer a same-strike spread // diagonal in that case. I was only making the point that diagonals are preferable to the penny/nickel verticals.
Mav always has my back . It is a worthwhile discussion to have. I occasionally take excessive risks and it is part of my nature. Picking them apart and analyzing the trade is what the thread is for and I apreciate it, even if it is usually at my expense (in a good way). But I am here for knowledge like everyone else. So carry on and let the discussion flow! -P
Rally: Testing out the CTM side of the force. I have an order for OCT 1360/1365 Call spreads since I do not see much more upside in the market and with 3 weeks to expiration. It is a relatively small position for me but still looks appealing. I have a limit order for a return of 22% at $1.10 and if I get filled I will post it. Seems like a good opportunity for a CTM when we are at (IMHO) an oversold area due for a small pullback.
Never thought i'd see the day Personally, i wouldnt be comfortable with the position you suggested but you are known for accepting higher risks.
Market seems to agree with me lol.... too bad i have not gotten filled yet... I had an order to sell 60 1360/1365 OCT Call spreads at $1.10. With the recent intraday crash, the b/a fell pretty fast so no fill....
If we push and close below 1341 on the futures, I would expect us to reach for 1330 in the near future on a normal pullback. With SPX I see a break of 1330 taking us possibly to somewhere near 1320..