Track That Trade; 120105

Double Diagonal (DD) spread using SPY as the underlying asset.

Paid debit of $57 per DD

Sold 5 SPY Feb 119 puts
Bot 5 SPY Mar 115 puts

Sold 5 SPY Feb 134 calls
Bot 5 SPY Mar 137 calls

Making the trade

Full Screen Video Recommended.


The Greeks

I have one question from T. who wants to know what the Greeks tell us. We begin this trade short 20 delta. That tells us that we have some extra upside risk – when compared with a position that is delta zero. When SPY moves one point higher, we lose $20 more than we would have lost had we been delta neutral. To me this is an insignificant risk.

Similarly, the other Greeks tell us nothing that we did not already know. Negative gamma tells us that we lose money if SPY rises, and the rate of loss accelerates. It also tells us that we may make a bit of money when SPY declines (due to the -20 delta), but that the -9 negative gamma will quickly overcome those short deltas and we will lose money when SPY declines.

Bottom line: The Greeks measure risk, and these Greeks tell us that there is little risk right now. That changes as conditions change, but right now the Greeks say: Relax.

Update Jan 18, 2012

Almost two weeks later, the position is losing three cents. WE could exit with a credit of $0.54

Jan 18; 10AM CT

SPY is 130 and the market has been trending higher. However, the short call carries a 27 delta, and right now, there is no cause for concern.

Decision: Hold

Update Jan 23

Discussing the idea of adjusting.

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Update Jan 25

THe market is rallying at I write this. It presents a perfect opportunity to see how a double diagonal can be quite risky whey the trade is opened for a decent-sized debit. [BUT PLEASE _ do NOT yake this as a suggestion that DD spreads must be opened for a credit. That presents a far different risk]

Note that the put spread is losing money.
The call spread is losing.

This is something that does not occur with the simple iron condor.

Update Feb 9, 2012

This trade has moved way too far against us. To be honest, risk has not been properly managed.
Here is the current situation at 9am CT:

Feb 9, 2012; SPX = 1352

The important consideration is what has happened to the put diagonal. Paying a decent-sized debit made the trade a loser to the upside. Our long put is slowing going away (delta only 4 now). Sure we did well on the Feb short put, but the big debit has hurt.

The call side is where the risk lies, but the loss growls slowly. However, now that the short option is ITM, all that we can do is exit the trade – eliminating further upside risk.

Note: It is now 7 minutes later and the market has reversed direction (for now). I still recommend getting out of the call portion of the trade. I would also exit the put side, but if you want to make a bearish play that is not too expensive, you can hold out a little longer.

For the record, we exit this trade with a loss.

12 Responses to “Track That Trade; 120105”


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