I did a double diagonal on Wal-Mart on Monday, 2010-03-22
BTO 2012 Jan 35 Call = 21
BTO 2012 Jan 70 Put = 16.35
Total = 37.35
Extrinsic value = 37.35 – (70-35) = 2.35
STO May 57.5 SC = .67
STO April 55 SC = .58
Total = 1.25
PE: Continue to sell short options until > 20% annual ROI. Roll up the shorts if ITM.
I have 22 months to sell short options to make money.
If WMT suddenly gaps up or down, the volatility will allow me to exit on my Jan 25 C and Jan 70 put as this is a long term strangle.
Note that within the first 2 months, I am already able to pay back more than 50% of my extrinsic. I expect to have a risk free trade by third or 4th month.
Thereafter, my target is to have about $0.9 per month. Assuming that I broke even on the 4th month, I should make 0.9 x 14 = 12.6 by the end of this trade or 22 % annual ROI.
If I can exceed 20% on my annual ROI at anytime, I will get out of this trade and search for a new one.
This trade is almost risk free. It takes a little bit of trade management but able to get 15-20% returns of your capital comfortably.
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I would have selected a higher strike than your Jan 35 LC to make it delta neutral with the 70 LP. I agree with the May 57.5 SC but you should be selling a sp in May also. Don't understand the April 55 sc unless you are splitting the quantities.
ReplyDeleteGood point. I should have taken note of the delta to choose the LEAP strangle.
ReplyDeleteI choose my short options based on the premium available. The may SC has 3x the premium of April and is closer to the stock price. If the stock weakened in April, I may close the SC and roll it down for another option in May. You get more premium this way for April than trying to sell an option for April and then another one for May.
As for the SP, the premium is good enough for me.
It takes a little calculation and some estimation of the probable resistance and support to decide on the premium.
Could you update this trade now that IVOL has increased a bit and the long optiond have lost a little value?
ReplyDeleteAlso could explain how you entered the original trade: as 2 strangles or as 2 diagonals.
Jean,
ReplyDeleteI have actually closed my trade accidentally on Oct 21. I wrote it here on my blog.http://zpring.blogspot.com/2010/10/portfolio-analysis-review-and-plan.html
I close WMT for a 17.46% annual ROI return after 203 days.
To understand how I enter DD, please read http://zpring.blogspot.com/2010/10/double-diagonals-new-trade.html. The change is that instead of Long term LEAPS, I use stock. As to how I choose the stock, it is based on the same principles.
You do not need to watch IV. You just need to time the shorts such that it does not go ITM and expire at the high premium.