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Calldiagonal

OPENING: EWZ JANUARY/JUNE 15/26 CALL DIAGONAL... for an 8.40/contract debit. Metrics: Max Loss: $840/contract Max Profit: $260/contract Debit Paid/Spread Width Ratio: 76.4% Break Even: 23.40 vs. 23.30 spot Notes: A neutral to bullish assumption, IRA-friendly play in the weakened EWZ. I naturally could have gone short put (the June 19th 19 shortie is paying .63), but wanted the opportunity to make something decent if it totally rips away. In a cash secured environment, you'll get some buying power relief over going with the naked. From a delta standpoint, the back month is at the 89 delta; the front month at the 28, with the front paying just a smidge short of the extrinsic in the back month (which is why the break even is slightly above where EWZ is currently trading). The way to look at these is a form a synthetic covered call, with the back month 90 standing in for your stock.
AMEX:EWZLong
by NaughtyPines
OPENING: TLRY SEPTEMBER/JUNE 5.5/7.5 CALL DIAGONAL... for a 1.33/contract debit. Metrics: Max Profit: $67/contract Max Loss: $133/contract Break Even: 6.83 vs. 7.78 spot Debit Paid to Spread Width Ratio: 66.5% Notes: With front month IV at 179%, running a small, bullish assumption engagement trade with this monied call diagonal right before earnings. Back month at the 90 delta, front month monied at the 61 with more than the usual amount of room to be wrong on the downside.
NASDAQ:TLRYLong
by NaughtyPines
OPENING ("THE KID"): QQQ AUGUST/JUNE 174/226 CALL DIAGONAL... for a 45.84 debit. Metrics: Max Loss: $4584 Max Profit: $616 Return on Capital at Max: 13.44% Break Even: 219.84 versus 224.86 spot Debit Paid to Spread Width Ratio: 88.2% Notes: I talked with the kid a little a bit about this trade ... . Although admittedly late to the game for a bullish assumption setup, she's looking at it from the standpoint of a cost basis reduction setup with trade management being to roll the short call out on extrinsic approaching worthless and then -- if necessary -- rolling the long out for a credit to continue the process, with short call premium providing a "cash flow." From a visualization standpoint, we worked through the scenarios: (1) At June expiry, price is above the short call strike: Either (a) consider taking profit at max there and re-up with a similar setup; (b) roll the short call out "as is" for additional credit, increasing max profit potential; (c) roll the short call up and out for increased max profit potential, as you would with a covered call; or (d) look to take profit first on the long side by rolling the long up for a credit and a realized gain toward the short call and then roll out the short call "as is" or up and out for an additional credit. Naturally, you can roll the long up at any time if the underlying experiences a "bodice ripper" and want to lock in the gain experienced on the long and reduce max loss potential by narrowing the diagonal spread (one of the positive things about the setup that you can't do with stock). (2) At any time short call value is approaching worthless: Either (a) consider taking profit if the setup is above break even; (b) roll the short call down intraexpiry for a credit; (c) roll the short call out for a credit, keeping in mind setup break even at that point (i.e., setup break even is slightly below the 220 strike, so in most cases, you would ideally not want to roll below that strike, although you'll be receiving a credit for the roll, which will lower that break even). (3) If you run out of road and are unable or don't want to exit the trade by expiry of the back month long, roll the long out for a small credit, and continue to reduce cost basis via short call. (4) If the underlying sells off to such an extent that the back month long strike is broken, consider "flipping the turtle on its back" by rolling the short call down and beneath the long call to continue to reduce cost basis and then, if necessary, roll the diagonal down as a unit toward current price if price has pulled away so much that you're not able to effectively reduce cost basis further because the setup is too far away from current price. And we'll see how that goes ... .
NASDAQ:QQQLong
by NaughtyPines
4
CALL DIAGONALS VS. SHORT PUTS: IRA BP EFFICIENT ACQUISITIONTypically, short puts have been the go-to methodology for acquiring shares at a lower price with the trade-off being that you don't take on the shares you want at the price you want, but keep the premium paid if the price of the underlying doesn't finish below your short put strike at expiry. That's not a bad thing, but what if (a) you want the ability to exercise for a lower price; and/or (b) want to undertake an acquisition strategy in a cash secured environment, like an IRA, where selling naked puts can be buying power intensive? Well, there is a setup for that -- the call diagonal. Pictured here is a typical 90/30 call diagonal in SPY, with the 90 delta long as far out in time as you can presently go and the front month at around the 30 delta strike. I don't endorse this particular setup here at all-time-highs, so it isn't a live trade or recommendation, but rather a means to compare and contrast the relative buying power effect of short putting versus doing a call diagonal. Although markets are wide for this setup in the off hours, making a precise pricing out of the trade momentarily elusive, it should price out with a break even at or below where the underlying is currently trading (298.46 as of Friday close). Consequently, it's safe to say that it should price out at spot (298.46) minus the long call strike (210) or 88.46 or even somewhat less. In other words, the buying power effect of the setup should be around $8850 per contract, give or take. Solely for purposes of buying power efficiency comparison, let's look at what it would cost to put on the 210 short put in the same month as the 210 long call: it pays 6.30 in credit with a break even of 203.70. That will be the buying power that doing that in your IRA will tie up -- in other words, it'll tie up 203.70 in buying power ($20,370) versus the $8850 that the call diagonal will. The other advantage to the call diagonal over the short put: the right to exercise the long call at any time, regardless of where the underlying is trading. With short puts, you don't have that right, so the only way you will acquire shares at the strike you want is if the underlying finishes below your short strike at expiry. Naturally, as usual, there are a couple of potential disadvantages. The call diagonal is a debit spread, so your max loss is known from the outset ( a very discernible advantage) and decreases over time as you roll the short call out for duration and credit, thus reducing your cost basis in the setup (another advantage). Nevertheless, it is conceivable that price can wind all the way down into your long call strike and then through it before you can reduce cost basis in the setup sufficiently to not lose money on it, all for the right to exercise the long call at a lower per share price and/or to tie up less buying power than you would short putting. Conversely, price could move substantially in your favor, making the right to exercise the long call at any time an advantage, particularly if the move is large. In contrast, the price of the underlying can break the short put strike, and you can still make money on the setup, assuming that your break even isn't violated. Even then, you can roll the short put out for duration and credit, reducing your cost basis and therefore your break even further, all before taking on shares. By the same token, badly broken short puts can result in uncomfortable drawdowns with you taking a series of realized losses on rolls, even if you receive a credit for doing so, particularly if the move is protracted. Conversely, price could move in the setup's favor, but the max potential profit in a short put is that of the credit received, so you get diminishing returns as price moves away from the short put, delta decreases, and theta decay eats into extrinsic. You can naturally roll the short put toward current price to pick up additional credit, but if you wanted in at a particular price, doing that won't necessarily help you in that regard. In a nutshell, call diagonals generally win over short puts in a cash secured environment for buying power efficiency, coupled with the right to exercise your long at any time if you're looking to get into the underlying at a particular price.
AMEX:SPYEducation
by NaughtyPines
TRADE IDEA: FXI AUG/OCT 41/36 "SCAREDY CAT" MONIED CALL DIAGONALOn occasion, I like to take small directional shots without hanging myself too far out there from a buying power perspective because I lack directional conviction or (more often), I'm working a small account where going full on covered call just isn't an option due to buying power effect. FXI has come quite far off off highs and doesn't appear hugely inclined to stop falling, at least in the short term. Naturally, trade war fears could quickly evaporate, and it could rip back up; alternatively, they may escalate, prompting a further sell-off. There are various ways to play my indecision, one of which would be to short straddle and/or strangle the underlying, but the background implied volatility isn't all that great here at 26.9%, so it isn't all that sexy as a pure premium selling play, so I have to think of something else. One option would be to short put at the 30 delta 40 strike (the Aug 17th's paying .64 with a break even of 39.36), but that's going to cost me roughly 20% of the short put strike (on margin) in buying power and/or invoke full notional value if cash secured. Alternatively, I can just money the covered out of the box by selling the Aug 17th 40 monied covered call (35.97 per one lot; 35.97 break even; 4.03 max profit on call away). Naturally, that's going to hang up 35.97 in buying power, even though the pure dollar and cents payout on call away is quite attractive (11.2% ROC). If you don't want to go that big buying power wise, but potentially realize a similar ROC percentage metric (~10%), there's the "scaredy cat," monied call diagonal with the buying power effect of less than 15% of the full-on covered call ... . Metrics: Max Loss on Setup: $455/contract Max Profit on Setup: $45/contract (9.9% ROC) Break Even: 40.55 vs. 42.08 spot Delta: 22.36 Theta: .86 Notes: As always, there's a downside to these. Realizing max profit with a monied generally requires that you wait toward the very end of the front month expiry for all the extrinsic to bleed out of the short, and you can't just "let it lay" as you would potentially with a covered call. Instead, shoot for taking off the whole setup toward expiry (assuming that the short call remains monied) at .05 short of max or consider rolling out the short call "as is" around 4-10 days until expiration for additional credit if you want to milk/reduce cost basis in the setup further.
AMEX:FXILong
by NaughtyPines
OPENING: TBT AUG/SEPT 37/33 UPWARD CALL DIAGONAL... for a 2.62/contract debit. Metrics: Max Profit on Setup: $138/contract Max Loss on Setup: $262/contract Break Even: 35.62 vs. 35.69 spot Debit Paid/Spread Width Ratio: 65.5% Notes: Basically, shorting treasury strength with the inverse instrument ... . Here, I'll look to take profit somewhat quickly, since I've only got one roll opportunity with this setup. I ordinarily like to do these as skip months (e.g., August/October) to give me more time to be right and more roll opportunities, but there is no October expiry available yet. You can naturally look at doing a similar downward put diagonal in TLT.
AMEX:TBTLong
by NaughtyPines
2
TRADE IDEA: VIX MAY 18TH 19 SHORT/SEPT 21ST 21 LONG CALLThis is a call diagonal that (at least currently), you would put on for a small net credit so that in the event price rips drastically away from the setup, you aren't out much. This particular VIX setup doesn't usually work well because we're in contango the vast majority of the time, and this generally makes the back month long cost too much relative to what you're receiving for the front month short. Currently, however, we're in an unusual term structure situation where there really isn't much difference between the /VX May futures contract (currently trading at 19.34) and the Sept (currently trading at 18.10). In fact, we're in backwardation, where the back month is trading lower the front month, allowing us to set this up for a small net credit.* Because of that, any profits you realize will be via rolls of the short call to bring in additional credit; merely allowing the setup to go to max profit (which would occur on a finish below 19) without rolling will net you jack diddly squat, since you'll be putting this on for a .05 or .10 credit, tops. Ideally, you will roll the short call aspect out for duration on strength, since this is a mean reverting instrument. However, if price does break through the short strike, you'll be merely rolling the short call out in time "as is." Although counterintuitive (since it's below spot), the spread is setup around where the May /VX contract is currently trading. * -- Assuming the term structure is like this at Monday open.
CBOE:VIXShort
by NaughtyPines
OPENING: XLU JUNE 47 LONG/APRIL 27TH 49.5 SHORT CALL DIAGONAL... for a 2.05/contract debit (82% of the width of the spread). Another defined risk, neutral to bullish assumption setup in the April cycle ... . The natural alternative would be to just sell short puts here (the April 20th 48's are paying .66; 32 delta), but the premium in those just didn't seem that worth it relative to buying power effect. For example, the general margin requirement for 48 short puts would be about 9.60 with the short puts returning about 6.9% on capital at max profit. In comparison, I'm looking for a quick and dirty ~10% ROC with this setup with the side benefits being that I'm not tying up a great deal of buying power, and I've got quite a bit of time to reduce cost basis in the long should it not go my way in short order ... .
AMEX:XLULong
by NaughtyPines
OPENING: XLE JULY 20TH 67 LONG/APRIL 27TH 71 SHORT CALL DIAGONAL... for a 3.14/contract debit (78.5% width of spread). Another neutral to bullish assumption setup with plenty of time to reduce cost basis. Currently, it looks like you could get a better fill than I did (mid currently at 3.00, 75% of the width of the spread, which is what you're looking for in these setups). Here, I'm shooting for 20% of what I put the trade on for. Metrics: Max Profit: .86/contract* Max Loss: 3.14/contract Theta: .37 Delta: 32.33 * -- Assuming no rolls of the short call and finish of the underlying above the short call strike at expiry. ** -- Assuming no rolls of the short call and finish of the underlying below the long call strike at expiry.
AMEX:XLELong
by NaughtyPines
OPENING: XOP JUNE 15TH 32 LONG/APRIL 20TH 35 SHORT CALL DIAGONAL... for a 2.49/contract debit. Metrics: Max Profit: $51/contract* (20.5% ROC) Max Loss: $249/contract** Notes: As with any diagonal, there aren't many metrics to look at. If you just leave the setup alone, however, your max loss is $249/contract, and your max profit is $51/contract. Max profit is realized with a finish above the 35 strike at expiry; max loss, with a finish below 32 and no rolls of the short call to reduce cost basis. Another way to look at the setup is that you're paying only 2.49 for a 3.00 spread ... . * -- Assuming no short call rolls and a finish above the 35 strike. ** -- Assuming no short call rolls and a finish below the 32 strike.
AMEX:XOPLong
by NaughtyPines
5
FXE: TWO BEARISH OPTIONS SETUPSFXE JUNE 16TH 105/108 SHORT CALL VERTICAL The first of the two setups is a "static" short call vertical with a break even around 106 resistance. Metrics: Probability of Profit: 58% Max Profit: $120/contract Max Loss: $180/contract BE: 106.20 Notes: Look to manage at 50% profit. FXE JUNE 16TH 107 SHORT CALL/SEPT 15TH 110 LONG CALL DIAGONAL This particular setup gives you some more flexibility in the event we do get some bullish movement in the short term, since you have opportunities to roll the short call for duration and credit during the life of the setup. Unfortunately, the vast majority of metrics for a diagonal are indeterminable from the outset, although the short call here, standing alone, has a probability of profit of 67%. This gives you a fairly high probability that you can completely finance the cost of the long in short order. Metrics: POP%: -- Max Profit: -- Max Loss/Buying Power Effect: $293/contract Notes: Look to roll the short call out for duration when it approaches 50% max profit to the next expiry in which you can receive credit for the roll.
AMEX:FXEShort
by NaughtyPines