OPENING: AMD AUG 18TH 13 SHORT PUT/OCT 20TH 11 LONG PUT DIAGONAL
... for an .11 credit.
Here, I'm looking for a defined risk strategy with which to play earnings that doesn't subject me to the risk on both sides if the underlying rips hard in a larger than expected move.
There are several different ways to play these: (a) Wait for the short put to approach worthless. At that point, examine what the long is worth. If its worth is "satisfactory," cover the short at near worthless and sell the long. Your profit will be total credits collected (original setup credit + what you got in credit for selling the long) - minus debits paid (what it cost to cover the short). (b) Work it like a calendar, rolling out the short put for a credit when it has lost a significant amount of its value (a good rule of thumb: 50%), covering the setup as a unit for a debit that is less than the total of all credits collected. (c) Work it like a calendar, but continue rolling the short put out toward the back month, until -- on final roll -- you roll the short put into a vertical spread, which you exit as you would a normal vertical spread. Profit is the amount by which total credits received throughout the life of the setup exceed any debits paid.
In the event that the price of the underlying breaks the short put strike, look to roll the short put out for duration, credit, and strike improvement.
You can naturally also roll the long away from current price to lock in any increase in value it experiences, for which you will receive a credit.
You can either roll the short put "as is," roll it toward current price, or roll it away from current price depending on the behavior of the underlying; naturally, you always want to receive a credit on any roll. Keep in mind that rolling the short put toward current price or the long away from it widens the spread, and increases risk and therefore buying power effect of the setup.
Here, I'm looking for a defined risk strategy with which to play earnings that doesn't subject me to the risk on both sides if the underlying rips hard in a larger than expected move.
There are several different ways to play these: (a) Wait for the short put to approach worthless. At that point, examine what the long is worth. If its worth is "satisfactory," cover the short at near worthless and sell the long. Your profit will be total credits collected (original setup credit + what you got in credit for selling the long) - minus debits paid (what it cost to cover the short). (b) Work it like a calendar, rolling out the short put for a credit when it has lost a significant amount of its value (a good rule of thumb: 50%), covering the setup as a unit for a debit that is less than the total of all credits collected. (c) Work it like a calendar, but continue rolling the short put out toward the back month, until -- on final roll -- you roll the short put into a vertical spread, which you exit as you would a normal vertical spread. Profit is the amount by which total credits received throughout the life of the setup exceed any debits paid.
In the event that the price of the underlying breaks the short put strike, look to roll the short put out for duration, credit, and strike improvement.
You can naturally also roll the long away from current price to lock in any increase in value it experiences, for which you will receive a credit.
You can either roll the short put "as is," roll it toward current price, or roll it away from current price depending on the behavior of the underlying; naturally, you always want to receive a credit on any roll. Keep in mind that rolling the short put toward current price or the long away from it widens the spread, and increases risk and therefore buying power effect of the setup.
Trade active:
Rolling out the Aug 18th 13 short put to the Sept 15th 13 short put for a .23 credit. Scratch point: .34.
Trade active:
Rolling out the Oct 20th 11 long put to the Nov 17th 10 put for a small realized gain and a .05 credit. Scratch at .39. Basically, an effort to slow decay of the long and give me additional time to work the short.
Trade active:
Rolling the Sept 15th 13 short put to the Nov 17th 12 short put for a .09 credit, so it's now a plain Jane Nov 17th 10/12 short put vertical with a scratch point of .48. Sometimes a "funky" setup isn't necessarily better. A plain old short put would probably have been just as, if not more, productive ... .
Trade closed manually:
Pulling this trade off here while I can for a .38/contract db, so a small, Happy Meal profit. Did not want to hold running into earnings/vol expansion.