give a shout out to "coach"...he likes helping out the ladies You stated its a neutral strat therefore keeping fairly delta neutral may make sense. Don't over adjust, you have a ways to go with the back month being Dec. IF you are right and the market between now and Nov trades in the 1220-1380 range you'll make money on both diagonals. More likely you may make money on one but lose on the other. That is why I suggested staggering the close (or roll). Of course you will temporarily no longer be delta neutral...but delta neutral is not a holy grail and with calendars/diagonals there are other greeks equally important namely vega. To see more possibilities why don't you run a couple of sim trades along with the real trade then you can try out various adjustments and see for yourself how they will work out.
The simplest way to adjust this is to roll the near month put and call when the premium has been squeezed out as much as you think it will be. You don't have to roll them at the same time. Obviously the ideal is to have the market at 126 a week or two before Sept expiration then roll both. However if in August we have a big rally and your short Sept is pennies then just buy it back....if the market goes down then you can buy back the short call and sell the Oct put....etc etc etc
Balljet, I have done several DD's before, and here is a good link for some helpful index DD info. http://mediaserver.thinkorswim.com/articles/TPDubDiagArticle.pdf
Thank Yo all for your help.. Excellent advice RR. If.. I were to close this pos. as one, my target is $250. But, I like the suggestions by RR to possibly close one short leg at a time and roll to the next month. One of my concerns right now is the possibility of a "crash" in the market. I guess the problem is if this would happen real soon, do you close or let it ride hoping for a bounce. My plan is to close right away. This trade was filled for a 2.80 dbt. I will start running some sims on rolls. Thanks all again for the great help and feedback.
simulate what will happen in the event of a "crash"...your front month vega will skyrocket and back month IV will only go modestly higher so you will suffer a pretty big hit. This is the big risk to calendars/diagonals. That is why most "pros" don't have a back month as far back as you do (dec). Since you have Dec as a "wing man" so to speak you might want to hold off depending on how deep and long the crash is. I guess what I'm saying is with the back month being so far out you shouldn't panic if we dip back down to 1200 or even 1175 (testing the lows) in the next few weeks. As long as the world hasn't come to an end. The good news is that the spy is a pretty good candidate for a DD right now because there is some volatility and its highly liquid. You have much higher risk of vol spikes/collapse doing this on individual stocks like GOOG, RIMM etc. with much higher IV's. You will be fine.
Thanks Gamma.. I was thinking it would be manageable on the SPY.. but with new credit concerns, I think the bottom could fall out. Well, we'll see. I will post when and if I have any developments and I truly am grateful for all the replies.