OPENING ("THE KID"): QQQ AUGUST/JUNE 174/226 CALL DIAGONAL
... for a 45.84 debit.
Metrics:
Max Loss: $4584
Max Profit: $616
Return on Capital at Max: 13.44%
Break Even: 219.84 versus 224.86 spot
Debit Paid to Spread Width Ratio: 88.2%
Notes: I talked with the kid a little a bit about this trade ... . Although admittedly late to the game for a bullish assumption setup, she's looking at it from the standpoint of a cost basis reduction setup with trade management being to roll the short call out on extrinsic approaching worthless and then -- if necessary -- rolling the long out for a credit to continue the process, with short call premium providing a "cash flow."
From a visualization standpoint, we worked through the scenarios:
(1) At June expiry, price is above the short call strike: Either (a) consider taking profit at max there and re-up with a similar setup; (b) roll the short call out "as is" for additional credit, increasing max profit potential; (c) roll the short call up and out for increased max profit potential, as you would with a covered call; or (d) look to take profit first on the long side by rolling the long up for a credit and a realized gain toward the short call and then roll out the short call "as is" or up and out for an additional credit. Naturally, you can roll the long up at any time if the underlying experiences a "bodice ripper" and want to lock in the gain experienced on the long and reduce max loss potential by narrowing the diagonal spread (one of the positive things about the setup that you can't do with stock).
(2) At any time short call value is approaching worthless: Either (a) consider taking profit if the setup is above break even; (b) roll the short call down intraexpiry for a credit; (c) roll the short call out for a credit, keeping in mind setup break even at that point (i.e., setup break even is slightly below the 220 strike, so in most cases, you would ideally not want to roll below that strike, although you'll be receiving a credit for the roll, which will lower that break even).
(3) If you run out of road and are unable or don't want to exit the trade by expiry of the back month long, roll the long out for a small credit, and continue to reduce cost basis via short call.
(4) If the underlying sells off to such an extent that the back month long strike is broken, consider "flipping the turtle on its back" by rolling the short call down and beneath the long call to continue to reduce cost basis and then, if necessary, roll the diagonal down as a unit toward current price if price has pulled away so much that you're not able to effectively reduce cost basis further because the setup is too far away from current price.
And we'll see how that goes ... .
Metrics:
Max Loss: $4584
Max Profit: $616
Return on Capital at Max: 13.44%
Break Even: 219.84 versus 224.86 spot
Debit Paid to Spread Width Ratio: 88.2%
Notes: I talked with the kid a little a bit about this trade ... . Although admittedly late to the game for a bullish assumption setup, she's looking at it from the standpoint of a cost basis reduction setup with trade management being to roll the short call out on extrinsic approaching worthless and then -- if necessary -- rolling the long out for a credit to continue the process, with short call premium providing a "cash flow."
From a visualization standpoint, we worked through the scenarios:
(1) At June expiry, price is above the short call strike: Either (a) consider taking profit at max there and re-up with a similar setup; (b) roll the short call out "as is" for additional credit, increasing max profit potential; (c) roll the short call up and out for increased max profit potential, as you would with a covered call; or (d) look to take profit first on the long side by rolling the long up for a credit and a realized gain toward the short call and then roll out the short call "as is" or up and out for an additional credit. Naturally, you can roll the long up at any time if the underlying experiences a "bodice ripper" and want to lock in the gain experienced on the long and reduce max loss potential by narrowing the diagonal spread (one of the positive things about the setup that you can't do with stock).
(2) At any time short call value is approaching worthless: Either (a) consider taking profit if the setup is above break even; (b) roll the short call down intraexpiry for a credit; (c) roll the short call out for a credit, keeping in mind setup break even at that point (i.e., setup break even is slightly below the 220 strike, so in most cases, you would ideally not want to roll below that strike, although you'll be receiving a credit for the roll, which will lower that break even).
(3) If you run out of road and are unable or don't want to exit the trade by expiry of the back month long, roll the long out for a small credit, and continue to reduce cost basis via short call.
(4) If the underlying sells off to such an extent that the back month long strike is broken, consider "flipping the turtle on its back" by rolling the short call down and beneath the long call to continue to reduce cost basis and then, if necessary, roll the diagonal down as a unit toward current price if price has pulled away so much that you're not able to effectively reduce cost basis further because the setup is too far away from current price.
And we'll see how that goes ... .
Trade active:
Rolled the entire diagonal as a unit on strength at open for about a 1.20 ($120) realized gain and a 1.61 ($161) credit "as is" and from the June/Aug to the July/September. Scratch at 44.23, BE at 218.23, max potential increased to: the width of the spread minus the scratch point or 52 - 44.23 or 7.77. This is one of the trade management options Dad "forgot to mention." It extends back month duration, thus allowing for additional time to reduce cost basis; reduces max loss; and increases max profit potential.
Trade active:
Oh, wow. She takes profit here at 47.26, 3.03 ($303) profit, 6.9% ROC for two weeks' work.