KRE June 16th 35/April 21st 55 Long Call Diagonal IdeaDo you ... fade this move?
Pictured here is a long call diagonal with the long leg out in June at the +90 delta, and the short leg out in April at the -30 to synthetically emulate the net delta of a covered call position (i.e., long stock/short call) where the short call of the covered call setup would be at the -40 delta strike.
Metrics:
Assumption: Neutral* to Bullish
Buying Power Effect: 15.09 debit
Break Even: 50.09 relative to 50.69 Spot
Max Profit: 4.91 ($491)
ROC%-Age as a Function of Buying Power Effect: 32.5% at max; 16.3% at 50% max; 8.1% at 25% max.
Alternative Setups:
April 21st 54 Covered Call. (Buy a one lot at 50.69, simultaneously sell the April 21st 54)
Metrics:
Assumption: Neutral to Bullish
Buying Power Effect: 48.09 debit (cash secured); 23.33 (on margin)
Break Even: 48.08 relative to 50.69 Spot
Max Profit: 5.91 ($591)
ROC %-Age as a Function of Buying Power Effect: 12.3% at max (cash secured); 25.3% at max (on margin).
April 21st 46 Short Put (25 Delta)
Assumption: Neutral to Bullish
Buying Power Effect: 5.46 ($546) (On Margin); 44.33 (Cash Secured)
Break Even: 44.33 relative to 50.69 Spot
Max Profit: 1.67 ($167)
ROC %-Age as a Function of Buying Power Effect: 30.5% (on margin); 3.8% (cash secured)
As you can see by looking over the metrics, there are various advantages to each setup.
With the long call diagonal, the ROC %-age stands out as its positive attribute, but the break even is basically at or near where the underlying is currently trading.
With the covered call, the buying power effect relative to the long call diagonal is a bummer, but you start out with a break even below where the underlying is currently trading. The max profit potential of the covered call relative to that of the long call diagonal is comparable, but the ROC %-age in the covered call is lower due to the higher buying power effect, particularly in a cash secured environment like an IRA, where the long call diagonal would be far more buying power efficient. There may, however, be some small advantage to being in the stock: KRE pays a dividend, but it's only quarterly, so it would conceivably pay a distribution in March (the next distribution) and June. The last distribution was .4058 (i.e., $40.58 per one lot), so we're not talking hugely motivating money here.
With the short put, your break even is more than $6 below where the underlying is currently trading, but the max profit potential isn't great relative to those of the covered call or long call diagonal. That being said, the ROC %-age at max is comparable to that of the long call diagonal.
* -- I classify covered calls and "synthetic covered calls" like long call diagonals as "neutral to bullish" assumption setups due to the ability to reduce cost basis over time via roll of the short call aspect so that you could conceivably make money if the underlying moves sideways.
Longcalldiagonal
Opened (Margin): AAPL Dec 16th 100/Nov 18th 136 LCD*... for a 23.23 debit.
Comments: (Late Post). Did this fairly obvious bullish assumption play in AAPL on Friday weakness, buying the back expiry 90, and selling the front expiry at-the-money. 2.77 ($277) max profit; 11.9% ROC at max; 6.0% at 50% max.
Cost basis of 23.23 with a 133.23 break even on a 26 wide. Max is realized on a finish above 136, with the profit zone being above the break even at 133.23. I don't have many cost basis reduction/rolling opportunities of the short call, so will money/take/run if given the opportunity. Currently, I'm shooting for 50% max/1.39 ($139) profit, so have entered a GTC order to take profit at 24.61.
* -- Long call diagonal.
Closed: EWZ June 17th 25 Long P/March 18th 26/30... for a 4.76 credit.
Comments: The most I could make on this was 5.00 (the width of the diagonal), so closed it out here with 39 days to go, rather than roll out the short call to April or hang out for the remaining extrinsic to bleed out. My cost basis in the entire setup was a 4.22 debit. (See Post Below). Closing it out here for a 4.76 credit results in a small winner of .54 ($54).
Closed (IRA): EWZ June 17th 25 Long Calls... for 7.45/contract.
Comments: With the short leg having expired worthless, went ahead and closed out the long leg of this diagonal here rather than covering it again. My cost basis was 6.37/contract as of the last short leg roll. (See Post Below). Closing out the long leg here results in a 1.08 ($108)/contract winner (which seemed to have taken forever).
Rolled: EWZ February 18th 32 Short Call to March 18th 30 Call... for a .38 credit.
Comments: Rolled the short call aspect of my long call diagonal, the back month of which is in June at the 25 strike. There wasn't much extrinsic left in it, so I first looked at rolling down to the 30 intraexpiry, but that wasn't paying squat, so rolled it down and out to a strike slightly above my cost basis/break even, which is now 4.54 with a 29.54 break even.
I still also have the 24 short put on, but that still has .30 left in it, so will wait until it approaches worthless before rolling.
Rolling (IRA): EWZ December 17th 33 Short Call to January... for a .22/contract credit.
Comments: Rolling the short call leg of my EWZ long call diagonal on approaching worthless (it's gone nearly no bid), the long leg of which is at the 25 strike out in June. (See Post Below).* My cost basis in the setup is now 6.37 with a 31.37 break even with a profit potential of the width of the diagonal (8.00) minus my cost basis (6.37) or 1.63 ($163/contract).
I considered just allowing the short call to expire worthless, waiting for a bounce, and then re-covering the long call leg, but you never know if it will continue lower or sideways, at which point you say to yourself, "Well, if only I would've remained covered, I'd have reduced my cost basis further."
Rolling: EWZ December 17th 32 Short Call to January... for a .25 credit.
Comments: With only 14 days to go in the short call aspect of my long call diagonal/Poor Man's Covered Call, rolling it out on this little bounce here to reduce cost basis in the setup further.
My cost basis in the diagonal is now 5.72 with the resulting diagonal spread being the June 25 long call/January 21st 32 short call.
Rolling (IRA): EWZ Nov 33 Short Call to December 33... for a .20 credit.
Comments: Rolling the short call aspect of my long call diagonal in EWZ here. I originally paid 6.79 (See Post Below), so this reduces my cost basis to 6.59 and my break even to 31.59. Will look to now take profit at the width of the diagonal (8.00) - the credit received for the roll (.20) or 7.80.
Opening (Small Account): EWZ June/Nov 25/32 Long Call Diagonal.. for a 6.26 debit.
Comments: Here, doing a similar trade to the one I did in my IRA (but with far fewer contracts) (See Post Below), buying the long-dated 88 delta call in the June expiry and selling the at-the-money call in November to create what amounts to a synthetic covered call. I paid 6.26 for a 7-wide, so my max profit potential is the width of the diagonal (7.00) minus what I paid (6.26) or .74 ($74), which would be a return on capital of 11.8% assuming the setup converges on max (7.00).
Immediately after fill, I entered an order to take the whole shebang off for 6.95 if that happens, which is a nickel short of max. Naturally, if that doesn't happen as we approach expiry of the front month, I'll roll the short call out for a credit, reducing my cost basis further, as well as improving my break even (which is currently the long strike (25) + 6.26 = 31.26).
Closing (IRA): JETS March 18th '22/October 15th 24 LCD... for a 7.63 credit/contract.
Comments: With max profit in the diagonal around the width of the spread (8.00), closing it here rather than waiting another 21 days for the remaining extrinsic to bleed out and/or risking that price returns to below 24. My cost basis was 6.49/contract (See Post Below). Closing it here results in a realized gain of 1.14 ($114)/contract, an ROC of 14.25% as a function of the spread width. I'll look to re-up if we get any weakness back to ~22. Otherwise, I'm still in UAL covered calls as my airline "reopening" trade.
* -- Long call diagonal.
Rolling (IRA): JETS September 17th 24 Short Call to October 15th... for a .36/contract credit.
Comments: This is the short leg of a long call diagonal, the long leg of which is out in March of '22. (See Post Below). There isn't a ton of extrinsic left in the September 17th 24, so rolling it here. Cost basis in the setup is now 6.85/contract - .36 = 6.49 with a break even at 22.49. I'm hanging out for a decisive break of 24 at some point ... .
Trade Idea: GLD March 18th 140/September 17th 165 LCD*... long call diagonal.
Comments: Here, I'm preliminarily pricing out a bullish assumption GLD setup, buying the back month 90 delta and selling the front month at-the-money call. I'd prefer to deploy this at that obvious support level at 160, which has resulted in some buying interest previously. If that occurs, I'd have to tweak the strikes slightly, selling an at-the-money 160, for example, and then buying whatever the 90 delta strike in the back month.
The Metrics:
Buying Power Effect: 22.79 ($2279)
Max Profit: The Width of the Diagonal Spread (25.00) Minus the Debit Paid (22.79) = 2.21 ($221)
ROC %-Age as a Function of Buying Power Effect: 2.21/22.79 = 9.7%
Break Even: The Long Call Strike (140) + the Debit Paid (22.79) = 162.79 versus a spot price of 164.64
Trade Management:
Take profit on the setup's approach of max (which would be 25.00).
Otherwise, roll out the short call to a strike at or above your break even of 164.64 to reduce setup cost basis.
Variations:
Preliminarily, I'm pricing out the setup with a fairly long-dated back month. To get in with less buying power effect, look to buy a shorter duration back month 90 delta, with the trade-off being that you'll have less time to reduce cost basis via the short call in the event that gold prices keep on going down. To look for more profit potential, sell a less monied call (e.g., the 30 delta) to give the trade more room to the upside.
Opening (IRA): JETS March 18th '22 16/September 17th 24 LCD** -- long call diagonal ... for a 6.85/contract debit.
Comments: I wasn't entirely satisfied with what I would be getting paid for my go-to strategy of selling short puts in this, so doing something a little more directional here. Buying the back month 89 delta, selling the front month 37 here and paying 6.85 for an 8-wide with a max profit metric of 1.15 ($115)/contract or 16.8% ROC at max (assuming convergence of price on >$24/share). Will work it like a covered call.
Closing (IRA): GLD September 17th 150/July 23rd 166... long call diagonal for a 15.43/contract credit.
Comments: Money, taking, running on this (which was pretty much my original intention if I got the move). My cost basis was 13.88, (See Post Below), so my profit is the difference between what I closed it for (15.43) minus my cost basis (13.88) or 1.55 ($155)/contract. 1.55/13.88 = 11.2% ROC. Naturally, there could be continuation, but the most I can make out of this diagonal is the width of the spread (16.00), and I'm not sure I want to hang out another 17 days (the duration of the front month), since it's been flopping back and forth across that 166 mark for a bit (which is where I'd need price to finish above to realize max).
Rolling (IRA): GLD July 16th 166 to July 23rd 166... for a .36/contract credit.
Comments: Here, just rolling the short option leg of my GLD diagonal (See Post Below) while price is right at the short call strike to bring in a little bit more credit, reduce cost basis further, and improve my break even a smidge. I originally filled this for 14.24 (See Post Below), so my cost basis is now 14.24 - .36 or 13.88 and my break even 150 (the long call strike) + 13.88 or 163.88. Max profit potential now the width of the spread (16) minus my cost basis of 13.88 or 2.12.
Rolling (IRA): SLV May 21st 25 Short Call to June 18th 25... for a .32/contract credit.
Notes: A continuation of a long call diagonal with the back month at the 16 out in January. (See Post Below). Rolling a smidge early here in advance of vacation. Cost basis in the diagonal now 8.08 - .32 or 7.76/contract with a resulting break even of the long call strike (16) plus 7.76 or 23.76.
Rolling: SLV April 16th 26 Short Call to May 21st 25... for a .41/contract credit.
Notes: With only .11 worth of extrinsic left in the April 16th 26, rolled the short call down to the May 21st 25 for a .41/contract credit. Cost basis in the diagonal now at 8.08 with a 24.08 break even and a current max profit potential of .92/contract on a nine wide (10.2% ROC at max, which assumes a finish above the short call strike).
OPENING (IRA): SLV JAN 15/MARCH 16/26 LONG CALL DIAGONAL... for an 8.74/contract debit.
Notes: In lieu of selling short puts, taking advantage of SLV skew here with a long call diagonal, buying the back month 91 delta and selling the front month 43. Paying 8.74 for a 10-wide with a max profit metric of 1.16/contract (13.3% ROC) with ample opportunity to reduce cost basis further and therefore increase max profit potential. The additional benefit is that this is more buying power efficient than, for example, selling a 20 delta short put here and with greater profit potential.
OPENING: INTC APRIL 16TH 37.5/FEBRUARY 19TH 45 MONIED LCD**Long Call Diagonal
... for a 6.83 debit.
Notes: The smaller account, skip month long call diagonal referenced in my INTC (IRA) Post (See Below). Buying the back month 90, selling the front month monied 75.
Metrics:
Max Profit: .67
Max Loss: 6.83
ROC at Max: 9.8%/70.1% annualized.
Break Even: 44.33
Delta/Theta: 17.45/1.4
Options Idea: Buy The Oct '20 JWN Call Calendar Spread @ $2.35Nordstrom has been a big loser since COVID-19 and is on a long-term downtrend. However, it's been on a short-term uptrend since late August and just blew through its July highs. The next objective will be the early August highs around $17.50. Our goal is to ride the short-term trend for as long as it lasts during September and October. We don’t want to own this stock long-term, but we’ll hitch a ride on this short-term trend with a long-call.
Since we’re not long-term owners of JWN we’re buying an Oct. 16 2020 call and we will sell weekly out of the money calls against it to lower cost basis. Look at the yellow trend line for a reference as to where JWN might be and that’s the area to sell weekly out of the money calls against this long call. Make sure your weekly short calls don't run up against the trendline.
Here’s how we set-up the trade:
Sold the September 11, 2020 $17.5 Call @ 0.25
Bought the October 16, 2020 $15 Call @ 2.60
Our objectives for short call income generation against this position are as follows:
Initial Objective: $1.23 (Extrinsic Value of Long Call)
Stretch Objective: $2.60 ($0 capital outlay)
We on the way toward meeting our initial objective by selling the Sep 11, 2020 call at $0.25 and next week we’ll sell another weekly out of the money call to get closer to our initial objective.
20-JWN-01
Opening Date: Sep 8, 2020
Expiration Date: October 16, 2020
DTE: 38
IV: 93%
IV Percentile: 56%
Odds of Winning: 36.60% (before selling more short calls)
Odds of Losing: 63.40% (before selling more short calls)
Win: > 17.35 @ Expiration (before selling more short calls)
Loss: < 17.35 @ Expiration (before selling more short calls)
Cash Requirements: $235
Chart Legend
Green Area: 100% Win Zone. If we finish above or in the green area, we’ve made a profit on our trade. Since our position has a long call that means our potential gain is unlimited after Sep 11, 2020. Up to Sep 11, we are limited in our gain by our short call.
Red Area: If we finish in this area we have a loss. The size of the red area is the size of our maximum loss. Since we have no uncovered options, our loss is limited on this trade to the price of our long call minus the credit taking in on our short calls.
1 standard deviation, 2 standard deviation, 3 standard deviation projections from Opening Date to Expiration Date are included.
Make sure to follow us on Tradingview for updates on this idea as we continue to reduce our cost basis in this trade.