17 May 2007

***Revise the price to $2.05 debit. Looks like it is very unlikely to get filled at $2.00 to close our call spread due to the dividend issue tomorrow. We'd rather pay a bit more to close up our call spread than to be assigned and made to pay $0.30 per share for dividend. Please adjust the price accordingly. It is highly recommended that you close this spread today to avoid any assignment tomorrow.***

Close Call Spread Recommendation for DIA Double Diagonal initiated on 21 Feb 2007

Trade Summary

DIA at 134.87
0 days to May expiration.

Buy DIA May07 128 Call
Sell DIA May07 130 Call

For a net price of $2.00 Debit or better.
Profit or Loss: -$100 per trade.

Trade Analysis

We are closing this trade with the maximum loss of $1.00 per trade. This double diagonal shows how much the market has moved over the past two and a half months. We initiated this DD on 21 Feb when DIA was trading at 127.32 (see trade history below). We were short 123 put and 132 call. Our short options were about 5 DIA points away from the upside and about 4 DIA points away from the downside. This is equivalent to a profitable range of 900 Dow points. As long as Dow 30 stays within these 900 points for the next 80 days, we'll be profitable. Sounds like a good trade then, or so we thought.

Then came 28 Feb, when Dow crashed more than 500 points in a single session. On 9 Apr, we rolled our DD. Thinking that the bulls will take some time to recover and the plunge from 28 Feb would have created multiple resistance levels that will take a while to overcome, we decided that our call side was too far from the market. We were short 132 call. On 9 Apr, DIA was trading at 125.9. In fact, we were more worried about our short put. So on 9 Apr, we closed our call side and rolled our put side for $0.65 credit.

On 13 Apr, we entered another call spread to collect a $0.50 credit. The 128 level was a widely held resistance as it was the prior high before the 28 Feb plunge. We all thought it would be very safe. We all thought it would take the bulls a least a month or two to recover from the shocking plunge. We couldn't be more wrong. The bulls came back with a vengence and the rest was history. It just kept going higher and higher day after day. It was such agony to see such a nice setup being destroyed. Today we'll close this chapter of agony in our trading journal.

Could we have done better with this trade? Maybe, we were planning to roll up our call spread but we didn't know where DIA will be heading. We saw no point in rolling up a strike or two, increasing our risk and to get knock over by the raging bulls in a few days' time. On hindsight, it was lucky we didn't. We could have rolled to 130/132 and we'll still be deep ITM today. We'll end up losing more. If we hadn't sell the call spread on 13 Apr, we'll be profitable today. Well, if only we knew then. We win some we lose some. This trade is one of the inevitable losses that we will see time and again. The flying bulls with wings are rare but they are destructive to our trades.

Gary

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

13 Apr 2007

Roll Recommendation for DIA Double Diagonal initiated on 21 Feb 2007

Trade Summary

DIA at 125.86
6 days to Apr expiration, 34 days to May expiration.

Sell DIA May07 128 Call
Buy DIA May07 130 Call

For a net price of $0.50 Credit or more.
Total margin required: roll.

Trade Analysis

This entry will give us a May iron condor. We initiated this trade as a double diagonal. We rolled it on 9 Apr to close up the call spread and roll the put spread into a vertical spread. After our 9 Apr roll, we ended up with short May 123 put and long May 121 put for a $0.50 credit net per trade. Today, we're adding the call side to complete this iron condor. To be more specific, we're selling the May 128 call and buying May 130 call for $0.50 credit. We will now have a May iron condor for $1.00 net. By completing this iron condor, we are not only reducing our risk, we are also making use of the margin set aside for the put vertical.

We believe this condor has a high probability of success. In fact, it has a probability of 56.81% of being profitable by May expiration. Furthermore, pull out a chart on DIA and you can see that 128 is a good resistance level. We'll inform you again on when to close this at an appropriate time.

Gary

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

9 Apr 2007

Roll Recommendation for DIA Double Diagonal initiated on 21 Feb 2007

Trade Summary

DIA at 125.85
10 days to Apr expiration, 38 days to May expiration.

Sell DIA May07 134 Call
Sell DIA May07 123 Put
Buy DIA Apr07 132 Call
Buy DIA Apr07 123 Put

For a net price of $0.65 Credit or more.
Total margin required: roll.

This is not a regular roll into an iron condor. We are closing the call spread (selling our long May 134 call and buy back our short Apr 132 call) and rolling our put spread (buying back our short Apr 123 put and selling May 123 put). We will end up with short May 123 put and long May 121 put.

Trade Analysis

This is a tough decision. We were pondering between closing the entire position to lock in some tiny profit and rolling this position into May. There is no point in rolling this double diagonal position into an iron condor the usual way because if we were to do that, we'll be short May 123 put, long May 121 put, short May 132 call and long May 134 call for $0.50 credit (the Apr/May 123/132 roll is valued at $0.65 but because we paid $0.15 to initiate this position, we end up with only a $0.50 credit).

The problem lies on the call spread. In fact, you can realize that we are not collecting any premium from the call side at all! We are paying our brokers commissions for nothing! So this roll is out of question.

Another option we have is to close this trade up altogether. We can do that for $0.30 credit, which means that we can lock in a tiny profit of $15 per position and release our margin for better trades to come as well as getting rid of all our risk. However, we feel that this may not be the wisest move. Because DIA is currently trading at 125, which is about 2 points away from our short put, we decided that we can make use of some of the options that we already have in hand. These 2 points on DIA translate to 200 Dow points. Furthermore, put up a Dow chart (daily), you can see that 12,300 was the recent low on 28 Mar. On 29 Mar, Dow bounced back up. So that 12,300 level is now a support. If you look back a bit further, you will also see that this same 12,300 level was a previous resistance level back on 12 Mar. So we believe that the 12,300 is going to be a good support.

So we decided to close up our call side (meaning we'll buy back our short Apr 132 call and sell our May 134 call) and roll our put side into a May vertical. We are now short May 123 put and long May 121 put for $0.50 credit. This vertical spread can make money as long as DIA trades above 122.5 by May expiration. We are considering to enter another call spread to complete this 1/2 condor. If we can find a call vertical for a good price, we'll have a May condor! We're currently looking at one possibilty, so we'll see.

Gary

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

21 Feb 2007

DIA Double Diagonal initiated on 21 Feb 2007

Trade Summary

DIA at 127.32
57 days to Apr expiration, 85 days to May expiration.

Buy DIA May07 134 Call
Buy DIA May07 121 Put
Sell DIA Apr07 132 Call
Sell DIA Apr07 123 Put

For a net price of $0.15 Debit or less.
Total margin required: $215.

Trade Analysis

We are initiating this double diagonal for a very low risk. We are risking only $15 for each trade. Some of you may want to try to get it at the mid-price of $0.10. We tried queuing for that price since morning but no luck of getting filled. $0.15 is a good price but, of course, $0.10 is better.

Our short calls and puts are 132 and 123 respectively, giving us a profitable range of 9 DIA points which is equivalent to 900 points in the Dow. We will not know our breakeven points until we roll this DD into an Iron Condor. However, looking at the current chart, we have more than 73% chance that DIA will expire between 121 and 132.

The current Mar/Apr roll is valued at $0.70. We'll hope to collect more premium when we roll this DD into a iron condor. This position presents a very low risk currently because it is very unlikely that this position will become worthless before April expiration. By then, we will have either rolled or closed up this trade. We'll continue to tracking this trade and inform you accordingly when it is a good time to roll.

Gary

Founder, Head Trader of MarketNeutralOptions
www.MarketNeutralOptions.com

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