I want to see how a strategy will play out and it will most likely be a multi-month expirement. What I want to do is look at put diagonals. I am looking to buy a put way out in expiration ATM. So for GE I am looking at the $17.50 put. Then I want to sell front month options against that purchased put. I realize that a few things could play out:
1) The puts I sold expire worthless and I can do it again month after month.
2) The puts expire in the money in which case I take delivery of the stock and start to write covered calls against the stock, which now gets me the same risk profile as a call spread (with a put, stock , an sold call).
3) The puts expire in the money and I could immediately turn around and exercise my right to sell with the purchased put. To me this is the least desirable alternative unless the stock has moved so much against me that it just makes sense to cut the trade with a maximum defined risk.
I am leaning towards trying to play it with scenario 1 and 2 in mind. But am open to the fact that the stock could potentially take a dump making it unappealing to continue forward with the strategy.
So lets take a closer look at what I am going to do:
So I am going to purchase the $17.50 put with Jan 2012 expiration which will give me plenty of time to see how this strategy plays out. This particular put is trading for 3.65. I am going to sell the front month May '10 $17 put which is currently trading for $0.18. This will put my overall cost basis at 3.47 for this diagonal.
I have chosen GE as the experiment stock as it is a name that I know and I think that it is less prone to huge moves which I think would not work well for this strategy. My thesis going into this trade is that this would work for more of a slow mover and not a momentum stock. But only time will tell.
I will post updates to the trade to the comments section of this post going forward.
Leg 1 = Buy 1 $17.50 Jan '12 put @ 3.65
Leg 2 = Sell 1 $17 May '10 put @ 0.18
1) The puts I sold expire worthless and I can do it again month after month.
2) The puts expire in the money in which case I take delivery of the stock and start to write covered calls against the stock, which now gets me the same risk profile as a call spread (with a put, stock , an sold call).
3) The puts expire in the money and I could immediately turn around and exercise my right to sell with the purchased put. To me this is the least desirable alternative unless the stock has moved so much against me that it just makes sense to cut the trade with a maximum defined risk.
I am leaning towards trying to play it with scenario 1 and 2 in mind. But am open to the fact that the stock could potentially take a dump making it unappealing to continue forward with the strategy.
So lets take a closer look at what I am going to do:
So I am going to purchase the $17.50 put with Jan 2012 expiration which will give me plenty of time to see how this strategy plays out. This particular put is trading for 3.65. I am going to sell the front month May '10 $17 put which is currently trading for $0.18. This will put my overall cost basis at 3.47 for this diagonal.
I have chosen GE as the experiment stock as it is a name that I know and I think that it is less prone to huge moves which I think would not work well for this strategy. My thesis going into this trade is that this would work for more of a slow mover and not a momentum stock. But only time will tell.
I will post updates to the trade to the comments section of this post going forward.
Leg 1 = Buy 1 $17.50 Jan '12 put @ 3.65
Leg 2 = Sell 1 $17 May '10 put @ 0.18
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