My post about the advisability of rookies using LEAPS was part of the blog carnival, Everything About Personal Finance.
A day off from the markets for Independence Day. Years ago I hated that. I wanted to stand in those CBOE trading pits 24 hours per day. That was a long time ago, and these days, I love the extra day off.
Happy holiday to all.
I have some questions for you on managing risk and complementing IC positions with double diagonals. In you opinion is it smart for an IC buyer to also sell some double diagonals to offset vega risk? I am just getting the hang of IC trading and I don’t want to over complicate things, but I thought I would ask the question and learn more about DD’s.
Right now I am continuing with my weekly purchase of IC strategy. I am buying 2 contracts of a RUT IC for the 3rd month (SEP right now) roughly once a week. I choose short strikes with a delta of 10 and try to get $1.80 per IC. Right now I have a few put spreads (6 contracts) left from my August IC positions and have GTC orders on these offering 0.30 each. I also own 6 Sep IC’s. For insurance I currently own one July 420 Put and one July 580 call. My risk curve is fine right now but once July expiration comes, I will lose the protection. At that point my current plan is to buy one Aug Put and one Aug Call (I don’t want to pay for more protection right now, as the July Call and Put are still working. Does this make sense to you?). At the same time (after July expiration) I will switch to buying the October IC’s each week, and put in GTC orders to close my September spreads offering 0.30 each (This is my autopilot early close plan that I really like. Of course if my short strikes are threatened or if time left gets below 3 weeks I will proactively close at higher prices).
What do you think about my risk management approach? Any suggestions to improve it? Will adding a weekly DD purchase allow me to avoid buying the call and put? I very new to trading IC’s so I like the idea of keeping it simple. But I also wonder if there is a way to get better protection at a lower cost.
What do you think of my strategy as a whole? For getting $1.80 to start I realize I give up a lot of this to buy back the spreads and for protection. The math I did tells me that after paying to buy back the spreads at 0.30, paying for insurance puts & calls and paying for commissions I am left with a profit about $0.70 – and that is assuming that everything goes well and I don’t have to adjust.
As an aside, I was intrigued by your latest video post where you mentioned you sold July put spreads with only two weeks left. I thought about doing the same thing a couple of weeks ago on the call side because my risk curve was so positive on the upside (when all my Aug Call spreads had closed automatically for 0.30). However I decided against it as I told myself I am still learning and didn’t want the added complications of near terms options. Right now my game plan is “close any short spreads when less there is less than 3 weeks left” (My gut tells me that as a beginner this is prudent).
I look forward to hearing your thoughts, and suggestions. My apologies for the long post. If you prefer that I break it up on multiple posts I can do that.
Are you trying to keep me busy forever?
I’ll do what I can to reply Monday morning.
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