📊 Earnings Edge: Diagonal Debit Dynamics - #2 Trade in 20242024 Trading Challenge Entry #2: Diary of an Option Trader
💡 Trade Overview:
I noticed LLY soaring on the TradingView stock heatmap today. Observing the monthly chart of AMEX:XLE (healthcare sector), it has been mostly sideways for years. However, in the past two days, NYSE:LLY has demonstrated strong bullish movement with increasing volume, indicating a potential uptrend. I strategized to profit from a possible breakout or continued trend within an ascending triangle pattern.
📊 Option Strategy choice:
Given the high IVR of 42 and an upcoming earnings report on February 6th before market, I anticipate further price rise. I pondered various strategies:
Single leg call: Not preferable due to increasing breakeven with time.
Naked put/credit vertical spread: Not ideal close to earnings, expecting IVR increase.
OTM calendar: Avoided due to back month’s illiquidity.
ATM calendar: Lower upper breakeven point was a concern.
Noticing that IV was higher for the front-month compared to the back-month, likely due to the nearing earnings, I decided a diagonal put debit strategy was ideal to allow significant upside potential while benefiting from minor retracements as time progresses and speculating on an IVR increase.
📊 Diagonal put debit Position Legs:
Chosen structure and execution details:
Buy LLY Mar 15, 2024, 600.00 PUT at 27.48 (Quantity: 1)
Sell LLY Feb 16, 2024, 610.00 PUT at 26.57 (Quantity: 1)
Trade Details & Key Metrics:
Symbol : LLY
Date/Time : 2024-01-03 15:00
POP : 54%
Required Buying Power ( Req.BP ): $1090
IVR : 44
Price : buying for $0.91 debit
Front month leg : February 16 @610 x 1 PUT
Back month leg : March 15 @600 x -1 PUT
📈 My Risk Tolerance:
For the 2024 trading challenge (goal: FWB:12K to $30k), I’m limiting floating losses to 1.5% per position, thus not tolerating more than a $175 loss. This threshold is approximately around a 590 strike price. While I’m comfortable with a considerable upside range, the upper breakeven at front month expiration is around a 711 strike, increasing to 760 at 21 DTE.
🎯 My Profit Target:
I’m aiming for about 2x the allowed loss, approximately around $300, but will consider taking profits if the price approaches the optimal equity curve point near a 650 strike. Realizing profits is always the more gratifying part of trading!
ANYWAY: HIT THE 🚀 BUTTON ABOVE!
This trade is part of my 2024 option trading challenge , where I aim to turn a 12k account above $30K 💰 (details in signature and my profile page) .
