TRADE IDEA: SPY SEPT 28TH 221 LONG/APRIL 27TH 285 SHORT CALL
This is a long-dated trade I re-up on a quarterly basis and with the March quarterly approaching (I've still got a June quarterlies setup on), it's time to consider a setup using the September quarterlies. I generally don't post these, because they have the pace of a covered call, and most aren't interested in basically watching paint dry or grass grow, opting for faster-paced trades in the 45 day or under cycle. However, if you're one that's pressed for time (and capital; a full on covered call with the same short call strike will run you north of 277.00 here), this is probably the slow-paced neutral to bullish assumption trade for you that you can potentially manage by just looking at the short call aspect once a week to see if anything needs to be done with it.
As with any diagonal, there aren't many metrics to show. Currently, the mid price for the setup is 58.36 in the off hours, meaning that you're paying 58.36 for a 64-wide spread with a max profit potential on setup of 64-58.36 or 5.64, which would generally occur if price finishes above the short call strike at expiry. However, max profit can also potentially increase over the life of the setup, depending on how many times you roll the short call and how much you receive in credit for each roll, since each roll for which you receive a credit reduces your cost basis in the setup.
The max loss of the setup is what you paid (58.64), which would occur if price finished below the long call strike, and you were a doofus and did absolutely nothing to defend (i.e., rolling down and/or out for credit). As with the max profit metric, this metric can decrease in time, since every roll of the short call for a credit decreases your cost basis and therefore your max loss.
A few tips:
1. Roll the short call out for a credit when it has lost more than 50% of its value. I generally roll out in time to the same delta'd strike, in this case, the 30 delta.
2. Be mindful of where your cost basis is at and, if possible, don't narrow the spread any more than your cost basis. For example, here the spread is 64 wide, but my cost basis in it less than that of a 59 wide, so I could conceivably narrow the spread on a roll of the short call down to a strike such that the spread is 59 wide and still make a profit if there was a finish above the short call strike at expiry. If I roll the short call down such that the spread is a 58 wide, and I haven't reduced my cost basis below 58.00, it's possible that I've just locked myself into a losing trade (although I can certainly roll an in-the-money short call for a credit in an attempt to fix that, although that's not ideal).
3. Generally, do nothing with the long call. On occasion, I will roll the long call up, but only intraexpiry (not out) if it has both substantially increased in value and its delta has increased. For example, if the delta has increased from 90 to 100, I will consider rolling the long call up to the 90 within the same expiry to lock in profit and to reduce the width (and therefore risk) of the spread.
4. Two things basically end this trade. The first is a break of my short call. When this occurs, I generally do not roll further since the setup is generally in a state where something at or near max profit can be realized. Toward expiry of the short call, I generally take the entire setup off in profit and then reset anew. Naturally, you can opt to continue to roll the in-the- money short call, assuming you can get a decent credit to do that. The other situation involves assignment, which can occur randomly if your short call is in-the-money and/or around ex-divvy, when there is an increased risk of that occurring. When that happens, I immediately close out the short shares I've been assigned, sell the long call, and then reset.
As with any diagonal, there aren't many metrics to show. Currently, the mid price for the setup is 58.36 in the off hours, meaning that you're paying 58.36 for a 64-wide spread with a max profit potential on setup of 64-58.36 or 5.64, which would generally occur if price finishes above the short call strike at expiry. However, max profit can also potentially increase over the life of the setup, depending on how many times you roll the short call and how much you receive in credit for each roll, since each roll for which you receive a credit reduces your cost basis in the setup.
The max loss of the setup is what you paid (58.64), which would occur if price finished below the long call strike, and you were a doofus and did absolutely nothing to defend (i.e., rolling down and/or out for credit). As with the max profit metric, this metric can decrease in time, since every roll of the short call for a credit decreases your cost basis and therefore your max loss.
A few tips:
1. Roll the short call out for a credit when it has lost more than 50% of its value. I generally roll out in time to the same delta'd strike, in this case, the 30 delta.
2. Be mindful of where your cost basis is at and, if possible, don't narrow the spread any more than your cost basis. For example, here the spread is 64 wide, but my cost basis in it less than that of a 59 wide, so I could conceivably narrow the spread on a roll of the short call down to a strike such that the spread is 59 wide and still make a profit if there was a finish above the short call strike at expiry. If I roll the short call down such that the spread is a 58 wide, and I haven't reduced my cost basis below 58.00, it's possible that I've just locked myself into a losing trade (although I can certainly roll an in-the-money short call for a credit in an attempt to fix that, although that's not ideal).
3. Generally, do nothing with the long call. On occasion, I will roll the long call up, but only intraexpiry (not out) if it has both substantially increased in value and its delta has increased. For example, if the delta has increased from 90 to 100, I will consider rolling the long call up to the 90 within the same expiry to lock in profit and to reduce the width (and therefore risk) of the spread.
4. Two things basically end this trade. The first is a break of my short call. When this occurs, I generally do not roll further since the setup is generally in a state where something at or near max profit can be realized. Toward expiry of the short call, I generally take the entire setup off in profit and then reset anew. Naturally, you can opt to continue to roll the in-the- money short call, assuming you can get a decent credit to do that. The other situation involves assignment, which can occur randomly if your short call is in-the-money and/or around ex-divvy, when there is an increased risk of that occurring. When that happens, I immediately close out the short shares I've been assigned, sell the long call, and then reset.
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