This week is filled with a lot of economic data, Tuesday being the heaviest of all. Housing starts and PPI at 8:30am followed by Industrial production at 9:15am. Uncle Ben will be speaking on Wednesday and CPI will also be announced on the same day. Be reminded that the week is also an US equity as well as index option expiration week, so a lot of volatility is expected.
I have been sharing my bearish bias for quite sometime now but how to play it safely without losing big some in case I am wrong. Here is an idea for playing Dow via diamonds (DIA)-
As shared in the “An Option Trader’s way to Short Moody’s” I am interested in playing diamonds with bearish bias but by limiting my gains as well as losses. This a put diagonal option trading strategy on DIA.
I am opening the following position for Jul’09 expiration, Day limit order:
- Buy to open DIA Dec’09 91 Put
- Sell to open DIA Jul’09 86 Put
Analysis: Market indexes have been staging impressive rally since Mar 9 bottom, but since early May Markets are caught-up in a sideway range with market internals deteriorating day by day. I expect these price levels to mark an area of indecision; my forecast is for a flat-to-downward market through Jul’09 options expiration. We selected DIA, the ETF that tracks the Dow Industrial. This trade is negative delta, positive vega and theta nicely fitting into the profile I am looking for.
The strike prices for this trade were selected on the based on the greek profile we wanted to obtain; in addition, the 91 and 86 areas in DIA has acted as prior resistance and intermediate support. The graph below plots the risk profile at expiration for this Put Diagonal.
My plan to use it similar to covered call strategy where I shall write put against it and roll it month after month. If however, market crosses the 9,00 area I might decide to roll the Long as well short up.
I shall continue to write as the trade progresses with time.
Profitable Trading, OP
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As of this writing (Tue, June 16th close) the Trade is up +8.3%.
Update Friday June 19, 2009 -
The Trade is up +10.3% (i.e. at $7.29 vs $6.60 cost)
As of Friday close (June 26) the trade is now up +13.3%.
Today on Jul 17th, the trade is selling for $8.06. Opening price was $6.60. A total of +22% profit without any need of adjustments.
Today I am rolling Jul 86 Puts to Aug 85 Puts for $1.58 credit.