Excellent IC for APR. I think the whole position will expire worthless. Since I was loaded in MARCH until recently I have not gotten any APR positions and today's aggressive limit price I placed for call spreads was not filled.
Murray...on the double diagonals...what is the probability of expiring on the shorts that you look for? In other words are you looking specifically at the ratio to get to 0 cost or do you look at probabilities?tia donna
ToS is currently down. They're trying to restart the system and hope to be up by the opening bell. In the meantime, if you logon under "Paper Money" you can at least get quotes. Also, they will be heavily manning the phones to take verbal trades.
Donna, The probability of the shorts expiring worthless is relative to the model you're using or the discussion group you're following. This discussion has taken place in many of these groups, journals, blogs, and is currently being discussed at the optionclub.com site. So to answer your question... I'm really not definitively sure. But to elaborate a little further, in this position, it really doesn't matter as much as it does with respect to the Iron Condor. As the positions approach the shorts, you make your maximum return. At the exact short strike, is when your maximum return, for all relative purposes to this discussion, occurs. (The exception being if the SPX went up 150+ points, the ratioed long position will increase faster than the ratioed short positions, thus creating an unlimited upside potential). Should the position gravitate beyond the shorts, but within the longs, then volatility plays a huge part. This is why it's difficulte to express a definitive return on Margin. That said... you can use historical prices to calculate approximations, but without the exact volatility increase or decrease it's hard to determine. If the Market Moves Down Big: If you think what may happen if the market moves from here (1298) to 1225 in the next five weeks or so.... I would imagine the volatility (VIX) would definitely increase. If the shorts expire worthless, you can bet the 1190p would be worth a ton with four weeks of time value remaining in it.... So... shorts expire worthless and pay for the intial trade, the value of your longs will be your profit.... which could be huge (20-40%). You may even have a few pennies left in the long May 1320c. As the market moves below your short 1225c, you lose 100 deltas at expiration. But remember, no time premium is left at expiration on the shorts. The long May 1190p are now increasing in delta and increasing in gamma and you have more of them than you do your shorts... ie, major profit. If the Market Moves Up Big: Same scenario as above, except volatility would probably bleed out of the long May 1350c, but there will still be some left along with time premium. Who knows... volatility may even pop up depending on the circumstances of the movement... eithe case, you still profit... If the Market Does Not Move: The shorts will expire worthless and the position will pay for itself, so any money left in the long positions will be your profit. You'll have to fight the MMs to get out of those positions, but historical data backtested around a 4-6% return. If the volatility bled out significantly... then 2-3% return on margin. Being at somewhat historically low volatilities levels.... the odds tend to be in our favor here. Summary: Picking the strike prices took some time with much trial and error. The volatility skew between the months change and along with the spread on the b/a, made the strike selections difficult. Hope this helps Donna. Sure wish I were trading "hair cut" margin. Congratulations Coach.... Murray
Murray: I am still interested in knowing how you chose the ratio of the longs to short in your diagonal. Were you going for the smallest amount of shorts possible while still having a net credit? What was the thinking behind 10 for the longs and 5 and 7 for the shorts? Before I paper trade this with real U.S. paper I want to understand your thinking. Is it always a ratioed diagonal or 1:1?
Coach: I'm trying to get a 1355/1370 filled at $0.65. What was the "aggressive" credit you were asking for yesterday?
I was trying to get the 1355/1360 Call spread for $0.40 with $0.45 the midpoint at one time. When the midpoint rose to $0.50 I raised the order to $0.45. I was staying a nickle off the mid all day and was not hit.
Coach, Our goal was to put on the spread for EVEN. We worked with strike prices available in May first to determine what longs were available to buy, then worked backwards to find the number of nearer term shorts in April which would cover the cost of the trade ratioed around 70% to give us unlimited upside should the market just shoot to the moon. You certainly could do 1:1 allowing your break even to initially increase, but you also introduce a loss scenario..... if the market continued up on a big move. You may also ratio the spreads, for a small debit and feel pretty good about profits outside the shorts as long as volatility works in your favor.... increases. Our downside, in the example, was put on last week on a down day. It was interesting as we originally placed the position for a debit, planning on increased volatility to cover the difference. When we we're filled in the morning... we legged into the trade and made out well. But originally, the downside leg was intended to be placed for a debit..... (assuming volatility would dramatically increase at this level). As far as the exact ratios..... 10:8 10:7 10:6 10:5, we used optionsanalysis software to give us a relative risk curve for up/down side movements to determine which ratio worked best. Obviously, Calendar analysis is subjective to volatility changes, so these were our best guesses. We also changed strike spreads to accomodate a break even target on a ratioed basis. We attempted similar positions on the RUT and QQQQs... w/o any success, but we did find and place a diagonal similar trade on the OEX. Our next quest is to look at timing entry points. Our recent backtesting has shown that entering the Put Diagonal on stochastic cross overs to the downside and entering the Call Diagonal on a cross over the upside works well in the current market conditions. But what we like most is.... say you guess wrong, completely... on entry.... and place a Put Diagonal on a cross over to the downside... and the market reverses and heads north.... you're not out anything... and you still may have a profit. That said, we still feel entering the entire position on the same day is probably best. You really want the market to move one way or the other. In fact, using a TA, we tried to set up our shorts at areas we felt the market may settle near upon expiration in April.... maximum profit for the Diagonal...... "Scary Scenario for the Credit Spread" Hope this helps, Murray