TRADE IDEA: USO OCTOBER 16TH 2 X 2/MAY 15TH 5 CALL RATIO SPREAD
Pictured here is a bullish assumption diagonalized call ratio spread with two times the number of long calls at the 90 delta strike in October as the number of calls in the front month with a 4.45 break even versus 4.47 spot. As of Friday close, it's priced at a 4.89 debit and had delta/theta metrics of 134.84/.45.
I generally visualize this setup in two, separate pieces -- one consisting of a long call diagonal and the other, a standalone long.
Assuming price breaks the short call running into expiry (and stays there), the long call diagonal consisting of one long call and the front month short will converge on max profit. This will be the difference between the width of the spread (3.00) and what it cost to put on one long call leg and the short call (2.17) or .83 ($83), at or near which that aspect should be stripped off.
The remaining call is then left to ride alone as synthetic stock to be taken off in profit, potentially targeting the $8-10/share, making a 5.25-7.25 profit on the standalone long conceivable.
In the event price doesn't clear the short call toward expiry, the short call aspect is rolled out to reduce cost basis further.
I generally visualize this setup in two, separate pieces -- one consisting of a long call diagonal and the other, a standalone long.
Assuming price breaks the short call running into expiry (and stays there), the long call diagonal consisting of one long call and the front month short will converge on max profit. This will be the difference between the width of the spread (3.00) and what it cost to put on one long call leg and the short call (2.17) or .83 ($83), at or near which that aspect should be stripped off.
The remaining call is then left to ride alone as synthetic stock to be taken off in profit, potentially targeting the $8-10/share, making a 5.25-7.25 profit on the standalone long conceivable.
In the event price doesn't clear the short call toward expiry, the short call aspect is rolled out to reduce cost basis further.