Double Diagonals - New Trades

I decide to enter 3 new trades on Double Diagonals - MY VERSION

They are WMT, HSY and PFE. I have drop JNJ for the LEAPs put from my list as the extrinsic is too high.

The key to selection of candidates for these trades are:

1. Sound companies with good cash flow, world leaders, good product line and trade in a range. I am not worry if it break up or down occasionally. The trade structure will protect any fluctuations. If somethings extraordinary happens that the stock shoots up to the moon or drops like a stone, the trade will do fine. Actually, the trade should make money because of its volatility increase. But this is not the reason for the trade.

2. Stock must issue consistent good dividends above 2 % and has no risk of terminating it.

3. LEAP puts has extrinsic value that can be paid back by SP and SC in 2-3 months. Many stock with high dividends tend to have high extrinsic as the dividends are built into the put.

Execution of the Trade:

o Execute monthly front month SC and SP to collect premium
o Never allow the SC or SP to go ITM. If ITM, just roll up and out the shorts to get a credit. There are times when the trend is strong, you may want to wait to roll until it stabilize. In my previous trade on WMT, I allowed one of my shorts to go ITM and was called out just 2 days before expiration. I lost some money but not enough to upset the overall profit of the trade. I will be cautious this time. The one key risk in this trade is if one of your shorts go ITM and be called out, you will lose money.

o One trick is to go with the trends. Add the shorts only if it is stagnating or hitting support and resistance.
o More adventurous trader may want to trade calendar within the stock and LEAP puts. This is not normally what I will do.


WMT

BTO 1000 stock = 53.65
BTO 10 Jan 2012 80 Put = 27.55
STO Nov 55 SC = .43
STO Nov 52.5 SC = 0.55

Extrinsic value = 1.2.

Most probably the trade will be risk free in 2.0 months.

Assuming a collection of average $800 per month from the shorts, it will collect $8000 in another 10 months or a return of about 10%. With the addition of 2.24% dividend, the total annual return should be about 12.24%

PE: Continue to short put and calls to achieve target ROI.

SE: At any time, if the annual ROI exceeds 20%, get out

2. HSY

Buy 1000 stock = 51.57
Buy Jan 2012 Put = 25.35
STO Nov 55 SC = 0.55
STO Nov 48 SP = 0.45

Extrinsic = 1.52

ROI should be similar to what was calculated for WMT above


3. PFE

Buy 1000 stock 17.64
BTO 10 Jan 2012 30 P = 13.25
STO Nov 17 SP = .22
STO Nov 18 SP = .2

Extrinsic = 0.89

I expect to pay back the extrinsic in about 2.5 months. This stock has a dividend of around 4.09%. The company is doing well although some patents are expiring for its leading drugs.

If I can get $300 per month, I should be able to generate a profit of $$2710 in 12 months ( 300 x 12 - extrinsic ). This is 8.8 % annual ROI. Together with the dividends, it is reasonable to target a 12% annual ROI for an almost risk free trade.

PE and SE are similar to the first 2 trades.