6 Mar 2007

Close trade recommendation for DIA Double Diagonal initiated on 25 Jan 07

Trade Summary

DIA at 121.58
9 days to Mar expiration, 44 days to Apr expiration. (My apologies, I wrongly stated the number of days left to expiration in the previous email alert.)

Sell DIA Apr 131 Call
Sell DIA Apr 120 Put
Buy DIA Mar 129 Call
Buy DIA Mar 122 Put

For a net price of $0.25 Credit or more.
Profit or Loss for March: $0.
Percentage Profit: 0%

Trade Analysis

We decided to close up this trade to take advantage of the up move today. We can get out with zero damage to our account except for commission charges. The massive market move recently made this DD is failure. There is no point in rolling this DD into an Iron Condor. If we do that, we can only get $1 credit for an IC that is already ITM. $1 minus the $0.25 that we put up leaves us with only $0.75 for an ITM IC.

Yes, alternatively, we could roll this into a Mar Quarterly/Apr DD by buying back our short Mar 129 call and short Mar 122 put and selling Mar Quarterly 129 call and selling Mar Quarterly 122 put for $0.45. We decided against doing that because of the sheer amount of volatility in the market currently. Nobody really knows what will happen next. Since we can get out of this clean, we decided to do just that and reassess the market. If you read the analysis below when we entered this trade, we really did not expect the Dow to make a 400 points down in just 1 week. In fact, we were rather bullish, trying to achieve some positive delta.

We are happy to come out even for this trade that didn't work out. Well, we should be glad that we lost only the commissions!

Gary

**********Trade History**********

25 Jan 2007

DIA Double Diagonal initiated on 25 Jan 07

Trade Summary

DIA at 125.03
49 days to Mar expiration, 84 days to Apr expiration.

Buy DIA Apr 131 Call
Buy DIA Apr 120 Put
Sell DIA Mar 129 Call
Sell DIA Mar 122 Put

For a net price of $0.25 Debit or less.
Total margin required: $225 per trade.

Trade Analysis

Although there are 49 days to March expiration, we feel that this double diagonal trade is a very low-risk one. Mainly because we will have 2 chance to roll this trade due to the quarterly options for March. For $0.25 apiece, this trade is reasonably priced. Furthermore, this trade has a delta of 4.56, which will give us some headroom on the upside. On the downside, DIA will have to breach its 20- and 50-day moving averages before it can get close to our short put of 122. The current Feb/Mar roll is valued at $0.80. If we can roll twice at this price we will have an iron condor for Apr for a very good price. If we can roll for more than $0.80, it's even better.

This diagonal has a 7-point range, which is a whopping 700 points when translated into Dow. We have a rooms to wiggle in: 300 Dow points on the downside and 400 Dow points on the upside. I'm not suggesting that the Dow can't move beyond 300 Dow down and 400 points up for the next 80+ days. It could happen. But we should be able to profit some by then. We'll keep an eye on the market and advise you accordingly on the appropriate time to roll.

Gary

Founder, Head Trader of MarketNeutralOptions
www.MarketNeutralOptions.com

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