31 May 2007

Close Recommendation for SPY (Standard & Poors Dep Rec) Double Diagonal initiated on 26 Apr 07

Trade Summary

SPY at 153.53
15 days to Jun expiration, 29 days to Jun (Quarterlys) expiration.

Sell SPY Jun (Quarterlys) 154 Call
Sell SPY Jun (Quarterlys) 143 Put
Buy SPY Jun 153 Call
Buy SPY Jun 145 Put

For a net price of $0.05 Debit or less.
Profit or Loss: $0.05.

Trade Analysis

Seems like the bulls are not giving up so soon. SPX just broke its all-time high in 2000. Without any resistance in sight, there is a fair chance that SPY will continue to soar higher. Therefore, we are giving up on this double diagonal. Our short call is currently ITM and we don't see the point of rolling it into an iron condor that us ITM. Closing this position now, we can breakeven. If we delay, we may even incur a loss. We don't like the prospect of an ITM condor.

Market is acting erratic and thus it is good to remain in cash and at the sideline of the market. It is risky to go bullish now, illogical to go bearish and pointless to go neutral because a few weeks down the road this neutral position is going to get into trouble. We'll trade lightly until a clear trend prevails.

Good trading
Gary

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

26 Apr 2007

SPY (Standard & Poors Dep Rec) Double Diagonal initiated on 26 Apr 07

Trade Summary

SPY at 149.64
49 days to Jun expiration, 63 days to Jun (Quarterlys) expiration.

Buy SPY Jun (Quarterlys) 154 Call
Buy SPY Jun (Quarterlys) 143 Put
Sell SPY Jun 153 Call
Sell SPY Jun 145 Put

For a net price of $0.10 Credit or better.
Total margin required: $190 per trade.

Trade Analysis

This double diagonal is almost risk-free since it offers us a small credit to open this position. This is a very neutral trade currently, with a delta of only 0.67. More importantly, you may have noticed that this is an unbalanced double diagonal: the call spread is 1-strike apart while the put spread is 2-strike apart. This way, this trade will have a lower upside risk. Considering how strong the bulls are suddenly, we'd want to be careful with our upside risk. We are using the Jun quarterly options because the shorter time frame reduces our risk exposure significantly. Jun Quarterlys expire on the last trading day of Jun, which is on 29 Jun. We can roll this trade into an iron condor within the next 49 days and close this trade totally within the next 63 days.

The current roll value, i.e., buying back the May 153 call and the May 145 put and selling the Jun 153 call and the Jun 145 put, is currently trading at $1.50 credit. We will most probably not be able to roll for a value this high because the number of days between Jun expiration and Jun Quarterly expiration is significantly lesser. However, if we can roll for a value close to this magnitude, it'll be a very low-risk trade.

Furthermore, our short options are positioned at strategic support and resistance level. The next resistance for the SPY will be the all-time high of about 153 while the support is at the 146 level, which was the high before the 28 Feb plunge. Support and resistance analysis has recently proved to be rather useless. The plunge on 28 Feb broke all possible support levels in 1 day (the moving averages and trendlines). More recently, the up move also defies gravity and shoots through all possible resistance. Despite all these, I believe technical analysis can still help us gauge a sensible range of values.

What had happened recently (the strong bull-run that is still ongoing) caught many of us by surprise. Most of our open positions are currently in the red, and yes, it pains us as much to see this happening and not being able to do much. We are constantly looking for a way out with minimal harm to our account. Losses are inevitable, we are more like doing damage control at this moment. If May is going to be a red month for us, this will be the first loser month since December. The market is clearly over-extended but we have no idea how long more it'll go up. We're waiting for a good time to close up some of our open positions. We have about 21 days. I really hate to say this, but let's hope and pray.

Gary

Founder, Head Trader of MarketNeutralOptions
www.MarketNeutralOptions.com

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