KRE June 16th 35/April 21st 55 Long Call Diagonal IdeaDo you ... fade this move?
Pictured here is a long call diagonal with the long leg out in June at the +90 delta, and the short leg out in April at the -30 to synthetically emulate the net delta of a covered call position (i.e., long stock/short call) where the short call of the covered call setup would be at the -40 delta strike.
Metrics:
Assumption: Neutral* to Bullish
Buying Power Effect: 15.09 debit
Break Even: 50.09 relative to 50.69 Spot
Max Profit: 4.91 ($491)
ROC%-Age as a Function of Buying Power Effect: 32.5% at max; 16.3% at 50% max; 8.1% at 25% max.
Alternative Setups:
April 21st 54 Covered Call. (Buy a one lot at 50.69, simultaneously sell the April 21st 54)
Metrics:
Assumption: Neutral to Bullish
Buying Power Effect: 48.09 debit (cash secured); 23.33 (on margin)
Break Even: 48.08 relative to 50.69 Spot
Max Profit: 5.91 ($591)
ROC %-Age as a Function of Buying Power Effect: 12.3% at max (cash secured); 25.3% at max (on margin).
April 21st 46 Short Put (25 Delta)
Assumption: Neutral to Bullish
Buying Power Effect: 5.46 ($546) (On Margin); 44.33 (Cash Secured)
Break Even: 44.33 relative to 50.69 Spot
Max Profit: 1.67 ($167)
ROC %-Age as a Function of Buying Power Effect: 30.5% (on margin); 3.8% (cash secured)
As you can see by looking over the metrics, there are various advantages to each setup.
With the long call diagonal, the ROC %-age stands out as its positive attribute, but the break even is basically at or near where the underlying is currently trading.
With the covered call, the buying power effect relative to the long call diagonal is a bummer, but you start out with a break even below where the underlying is currently trading. The max profit potential of the covered call relative to that of the long call diagonal is comparable, but the ROC %-age in the covered call is lower due to the higher buying power effect, particularly in a cash secured environment like an IRA, where the long call diagonal would be far more buying power efficient. There may, however, be some small advantage to being in the stock: KRE pays a dividend, but it's only quarterly, so it would conceivably pay a distribution in March (the next distribution) and June. The last distribution was .4058 (i.e., $40.58 per one lot), so we're not talking hugely motivating money here.
With the short put, your break even is more than $6 below where the underlying is currently trading, but the max profit potential isn't great relative to those of the covered call or long call diagonal. That being said, the ROC %-age at max is comparable to that of the long call diagonal.
* -- I classify covered calls and "synthetic covered calls" like long call diagonals as "neutral to bullish" assumption setups due to the ability to reduce cost basis over time via roll of the short call aspect so that you could conceivably make money if the underlying moves sideways.
