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SPY Dec/Jan DD

Published on November 4, 2006

SPY Dec/Jan DD

November 4, 2006

Risk $2200/Reward $954 with upside potential

I am reviewing few trades for the next month play..following is one of those. It is a double diagonal for SPY.

Short Dec call (141) and Put (133), Long Jan call (143) and Put (131) for debit of $0.20/contract.

It is quite market neutral trade with a bias for IV rise. For every 1% increase in IV this will earn, $6.7/contract. My break even points are $131/$142. As long as SPX remains between 1320 and 1420, I am fine. I will lose money if IV drops further by more then 2%. As per current IV, my investment is $2,000 for 10 contract + $200 for the debit. The maximum rewards as per current IV are $954 in one month. I will have Chance to roll double calendar around December expiration which will result in $2 wide Iron condor.Based on above volatility chart, it seems the IV is at lowest level i 1 year. I have buffer of IV going down by another 2% before this position starts to lose money. To note though, if IV rises by simply 3%, I will easily be making nice 5-6% quickly on this trade.

Profitable trading

OptionPundit

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