| Ira, first of all, thank you for the time you took to write the very detailed answers which i will print and work out in my notebook. I understand the mechanics of the diagonal spreads (the strategy) so it is the comments about the tactics that i appreciate the most.
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I primarily use diagonal spreads to buy intrinsic value and sell extrinsic (time) value. I break the generally accepted rules in that I leg into most positions, trying to buy the long call on short term weakness and trying to sell the short call on short term strength...It can burn you because you are naked long for a period of time without the short as a hedge, but has worked for me most of the time.
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yes, i am sure breaking the rules works most of the time, however you must have a high amount of confidence in your art and have full attention to devote to your open positions. I always initiate this trade simultanously, buying and selling at the same time.
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With GFI, the difference between the strikes is 2.50 and the net premium paid is 1.35, so it meets the criteria I stated.
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Thnank you
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However, I tend to buy a little more in the money and sell nearly at the money to lower my "break even" point. In your case, if implied volatility remains constant, break even is about 10.65 at October expiration of the short call. So, the stock has to rise by almost 3% in 4 months for you to break even... If it closes above 12.5 (a 20.5% rise), your return is about 80%...pretty good, but you better be confident in the direction of the stock.
I like a little more downside protection...
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I have done the calcs on paper and you are right.
I prefer further in the money long calls and nearer the money short. I give up on percentage return, but have more victories because of better downside protection. I also stick with high liquidity options and prefer higher priced underlying because the bid/ask spread is smaller percentage wise.
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my play ground is Precious Metals really and the choice is fairly limited there. For the time being at least... I have already done a similar trade on NEM and aside from them the pool is thinnnnn.
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I don't use calendar spreads looking for home runs, like 80% in 4 months, I'm looking for good rental properties with consistent cash flow to live on. And like all rental issues, you have to keep an eye on it and take appropriate corrective actions, depending on the action of the market.
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Good points there. Too bad I have so many battle scars to show for the little learning i did...
Yes this is my approach here, not looking for a home run either. I meant to add that the symetrical rule does not apply once the trade is on, although it applies to the short side. Just do not want to be naked short for any amount of time. also looking at O&G stocks to apply same strategy.
Again, many thanks for your time helping a rookie.
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PS edit: dont know why but i can indent and create paragraphs in my answers... First time it happens using SI . My apologies if this is hard to read...
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