17 May 2007

Close Call Spread recommendation for DIA (Diamonds Trust) Double Diagonal initiated on 30 Mar 07

Trade Summary

DIA at 134.89
0 days to May expiration, 28 days to Jun expiration.

Sell DIA Jun 130 Call
Buy DIA May 128 Call

For a net price of $1.35 Debit or less.
Profit or Loss: -$145 per trade.

Trade Analysis

This double diagonal is another victim to the flying bulls. In fact, most of our positions lost money in May because of the bulls. We entered 1 or 2 more positions for May thinking the market would trade in a range after a massive plunge (like it always does) to take advantage of the sideway movement. A double diagonal is normally resilient enough to not suffer a loss of this magnitude. This time it was different. The time value in the Jun options were not enough to offset the intrinsic value of the May options.

We'll close up only the call side to save on commissions. The short 120 May put will expire worthless after tomorrow. We'll hold on to the long Jun 118 put instead of selling it to save on commissions. There will be no margin requirement needed for the long put so we'll just leave it alone. It will most likely expire worthless in Jun as well.

Gary

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

30 Mar 2007

DIA (Diamonds Trust) Double Diagonal initiated on 30 Mar 07

Trade Summary

DIA at 123.17
48 days to May expiration, 76 days to Jun expiration.

Buy DIA Jun 130 Call
Buy DIA Jun 118 Put
Sell DIA May 128 Call
Sell DIA May 120 Put

For a net price of $0.10 Debit or less.
Total margin required: $210 per trade.

Trade Analysis

This double diagonal took a while to get filled. I have been eyeing it since yesterday when it was trading at $0.05. I queued for a pretty long time but still I couldn't get it for $0.05. I decided to tweak it up a little and still I have got to wait. Finally I was filled at $0.10. A nice price for a nice DD.

This DD is currently very neutral, having a delta of only 1.00. With 48 days to go, the short May options we sold are at very good price. The short May 128 call is currently trading at $0.40 while the short May 120 put is currently trading at $1.25. The current Apr/May roll is valued at $1.05. If we can roll at this value, we'll have a 8-point wide condor for Jun for a very good price.

This position is not without risk. However, we believe that the risk involve is small. The market is still very undecided and choppy. Fear is high. Although it is not impossible that the Dow crashes another 300+ points in the next 76 days, we believe the probability is pretty low looking at the current state of affairs. This is an 8-point wide DD which is translated to about 800 points on the Dow. We have that much leeway to be wrong and about 48 days to correct our mistake. Thus, we think this is a low-risk trade.

Do take note that this trade will cancel out some option position from another advisory. Specifically, we're talking about the DIA DD initiated on 8 Mar. For the DIA DD initiated on 8 Mar, we bought May 128 call and sold Apr 126 call. Now for this DD we'll be selling May 128 call and buying Jun 130 call. The net effect is that we'll be short Apr 126 call and long Jun 130 call. The margin requirement for this position is $400 because the most you can lose is $400 for these two trades. Do not leg in this position. Enter this trade as a double diagonal spread. If you leg in and you get filled to sell your May 128 call first, you will be naked short Apr 126 call. Your broker will scream for you to provide more margin since you are having a naked call position. Do Not Leg In. Enter As A Spread.

My advice to all subscribers will be to keep a trade journal. Not only you can keep track of your trades and winnings, you will not be confused by mutual cancellation like what we see today. Also, do not think of these two trades as one. When the advisory comes for the roll, just enter every positions stated.

Gary

Founder, Head Trader of MarketNeutralOptions
www.MarketNeutralOptions.com

Please note: All MarketNeutralOptions Advisory emails are price sensitive. Therefore, all recommendations, unless otherwise noted, are applicable for 'DAY' orders only, not good-till-cancelled. If a recommendation cannot be filled, we may choose to resend the email the following day along with any modifications.
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