Holy crap... let's hope his actual sales pitch to the retirees down in FL is as bad as mangled knowledge of finance.... But, to be fair, wolinksy - I'll take back what I said earlier: you are exactly the type made for being a hardcore CFA member: arrogant, mostly ignorant about how little you actually know, and on that slimy fringe of the industry know as retail sales that makes the rest of us somewhat queasy to be associated with; If you ever manage to pass level III, I have no doubt you'll become the head of your local CFA chapter quickly.
You're naked after Dec expiration. It's a bear-delta term-structure trade (short "switch" (back month) and vola)) and I would not want to be short a naked SPX put (synthetically) in March. Your hedge has less than 5 weeks remaining. You need a rally into Dec and then a drop, unfortunately, the haircut will more than double and it offers you no opportunity to roll out of Dec either through time or price. Your haircut more than doubles after Dec rolls of as well. Are you comfortable holding the Mar naked call at a 75-credit? IOW, will the Mar call be trading +/- 0.75 on Dec 16 (in your estimation)?
I thought the 33c was SOLD ? Once the 30c expires, if you keep the 33c. would you not be naked. Am I missing something, did I read it wrong?! How is the upside 'unlimited' in this diagonal - was the 30c sold and the 33c bought? ?
who is laughing now? Who is being arrogant ? who is clueless? He was correct - you were wrong!!!! just saying!
To be fair, he was commenting on your original trade, which had an obvious typo in the Dec strike price (30 vs. 37).
You're naked after Dec expiration. That's correct and I will be out of the trade by Dec 2011 expiration of Dec 17th, the red line on the graph. I am covered until Dec expiration which is all I care about. It's a bear-delta term-structure trade (short "switch" (back month) and vola)) and I would not want to be short a naked SPX put (synthetically) in March. Neither would I. Your hedge has less than 5 weeks remaining. You need a rally into Dec and then a drop, unfortunately, the haircut will more than double and it offers you no opportunity to roll out of Dec either through time or price. Your haircut more than doubles after Dec rolls of as well. Win, lose or draw, my termination is Dec 17th or sooner. Are you comfortable holding the Mar naked call at a 75-credit? IOW, will the Mar call be trading +/- 0.75 on Dec 16 (in your estimation)? I have no idea what will happen, but I am covered until Dec. expiration, my max loss is defined, my margin is reasonable and I have potential for unlimited upside. For example, IRAN launches Nukes at Israel and the market dumps 1,000 points. This trade would increase almost 300%. Most likely, there will be some theta decay by Dec expiration. Lets say, its .25, then my return after closing the spread would be (75-25) / 216 = 23.2%. I am happy to take that. Hope this helps.
March would explode if market tanked. Dec would trade a small premium over intrinsic as we approach exp. At 33 you're looking at perhaps 3.50 on Dec and 4.50 on March (say Dec 5). Unlimited upside?!