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| 16 May 2007 Close Trade Recommendation for DIA (Diamonds Trust) Double Diagonal initiated on 8Mar 07 Trade Summary
Trade Analysis We decided to close up the call side of this trade now because of the low price that we have to pay to exit our call positions. We tried to get it filled for $0.00 but it just won't move. By closing the call side, we are essentially over this trade. The put side will expire worthless on Friday so we'll save on commission by leaving them as they are. Our hedge worked in limiting our loss on this trade. Without the hedge, we would have lost $0.80 per trade. With this hedge, we reduced our loss by 50%. As mentioned in the previous analysis, we could have closed this entire trade with a loss of $35 per trade. That is true. But we decided to pay a little more to eliminate all risk. The reason is because for this hedge to work in limiting our loss, DIA must be trading above 131.55 on Friday. Although that is more than 2.5 points (more than 250 Dow points) away, we have seen how Dow can lose more than 500 points in a day recently (28 Feb). Putting on a hedge not only makes the entire position more complex than it should be, it also inevitable opens more risks to us. Should DIA trades between 127.3 and 131.55 on Friday, we will be losing $0.80 from our original position and more from the hedge because the hedge will be worth less than $1.55. With this in mind, we decided that $5 is a reasonable sum to pay to eliminate all these possible risks. Gary **********Trade History********** 2 May 2007 Hedge Recommendation for DIA (Diamonds Trust) Double Diagonal initiated on 8Mar 07 Trade Summary
Trade Analysis The market seems to be flying and there just enough gravity to do any harm to this flight. We rolled this DD into an iron condor on 11 Apr for a very good credit. On 11 Apr DIA was trading at a mere 125.05. Today it is trading at 132.28 and flying higher by the day. 11 Apr was only 19 days ago, including weekends! Obviously, our neutral trade will not be pretty with all the bulls roaring over it. So we are initiating a hedge for this position. It is very highly likely that this trade is a loser in 15 days' time. We just can't see how the market can crash to 127.3 soon enough for us to breakeven for this trade. Therefore, we decided to join in the bull camp to reduce our loss. For this position, our maximum loss was $0.80 per trade. We initiated this trade of $0.10 debit, rolled it for $1.30 credit, and thus, we are short an iron condor for $1.20 credit. By entering this hedge, we are paying an extra $1.55 to make $0.45 per trade. The breakeven for this hedge is 131.55. As long as DIA trades above 131.55, we can profit $0.45 per hedge. This $0.45 will lessen the pain of the $0.80 loss. By expiration, if DIA is trading above 131.55, we will take in our $0.80 loss and our $0.45 profit from the hedge. This will result in a $0.35 loss per trade. A loss is still a loss but we are glad that we can cut our loss by $0.45. Every adjustment or hedge always cost more money. So please review your trade allocation to ensure that you always have enough cash to adjust and hedge an ailing position. The rule of the thumb is: do not risk more than what you can afford to lose. What had happened in the past 19 days was something of very low probability 19 days ago. It won't happen most of the time. But the point is, it can happen. It's quite hard to imagine a bull with wings but that is exactly what we're seeing now. Very big wings at that. Gary **********Trade History********** 11 Apr 2007 I'm terribly sorry to key in the wrong probability for this roll analysis. The probability should be 59.63%, not the 80.26% as mentioned below (highlighted in red). Sorry for the misinformation. I just got news that auto-trade participants are all filled for this trade. Roll Recommendation for DIA (Diamonds Trust) Double Diagonal initiated on 8Mar 07 Trade Summary
Trade Analysis This roll into a May iron condor is not without risk. But we decided that the potential reward that we can get is well worth the risk. After this roll, we'll be short May 118 put, long May 116 put, short May 126 call and long May 128 call. We paid $0.10 to initiated this position. Now we're rolling for $1.30 credit. We are selling this condor for a net $1.20 credit with only 36 days to expiration. This same iron condor is currently selling at $0.95. We'reselling it for $0.25 more! Our breakeven points are now 127.20 on the upside and 116.80 on the downside. It is the upside that we have to watch out for. At current level, DIA is only about 1 point away from our short put. So a short term downmove will be good for this position. It seems like the market is beginning to feel bullish again, thus we expect DIA to breach our short call of 126 in a few of these 36 days. On the technical front, DIA's recent (all-time) high was at 127.37 on 20 Feb 2007 (before the 28 Feb crash). We expect DIA to take some time for the journey back to the prior all-time high. Hopefully, it'll take longer than 36 days. From the tos platform, we can see that the probability of this condor to be profitable stands at 80.26%. Although this is a good double diagonal rolled into a decent iron condor, I personally will be more comfortable if DIA trades below 125. We'll be in touch on when to close this trade. Gary Founder,
Head Trader of MarketNeutralOptions **********Trade History********** 8 Mar 2007 DIA (Diamonds Trust) Double Diagonal initiated on 8Mar 07 Trade Summary
Trade Analysis This double diagonal has a negative delta of -5.7, which makes it a little bearish in nature. However, it is still very much a neutral position. With the current price of 122.63, our short put of 118 is about 4.63 points away to the downside. That translates to about more than 450 Dow points on the downside. On the other side, our short call of 126 is about 3.37 points away. That translates to about 330 Dow points upwards. In essence, we are having a range of about 800 Dow points for the Dow to move around for the next two months. As long as there is no any massive move up or down any time soon, this trade seems to have a very low risk.
We don't really know our actual risk until we roll this DD into an iron condor. The current Mar/Apr roll value (buy the Mar 126 call and Mar 118 put and sell the Apr 126 call and Apr 118 put) is valued at $1.30. With 7 days to Mar expiration and 42 days to Apr expiration, this roll value is very high. By looking at the roll value of the nearest months, we can have an idea of how much we can expect to collect when we roll in the future. However, do note that April options are expensive due to the recent spike in IV. If we can roll for a value close to $1.30, we will be short an May iron condor for a very good risk/reward. Let's hope the market trades normally now. Those wild movements destroyed some of our setups. We'll keep a lookout for a good time to roll this DD and inform you accordingly at the quickest time possible. Gary Founder,
Head Trader of MarketNeutralOptions
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