Diagonal Ratio Backspread Journal

F

frostengine

The purpose of this journal will be to track my Diagonal Ratio Backspread trades. While I have been trading for nearly 10 years, I have done very little option trading until recently.

Open Positions from March 26:
Sell 1 CAT Mar28 87.5 call for -.43
Buy 2 CAT Apr20 90 calls for .54 each
Initial Debit: $.65

Today I made the following trades:
Buy 1 CAT Mar 28 87.5 call for .15
Sold 1 CAT Apr 5 87.5 call for -.68
Current Debit: $.12

Sell 1 GDX April 5 38 call for -.42
Buy 2 GDX Jan 17 38 call for 3.80 each
Initial Debit: 7.18

Sell 1 POT APril 5 39.5 call for -.38
Buy 2 POT Jan 17 40 call for 2.65 each
Initial Debit: 4.92

Sell 1 IWM April 5 93.5 put for -.35
Buy 2 IWM Sept 20 96 put for 5.52
Initial Debit: 10.69
 
I am scratching my head on the GDX and IWM trades. What's the point of the short side here? These are essentially outrights, so why the 30-40 cent shorts?
 
Quote from atticus:

I am scratching my head on the GDX and IWM trades. What's the point of the short side here? These are essentially outrights, so why the 30-40 cent shorts?
More...

I view the position as a sort of mix between a covered call and an outright call. Basically, the short side provides just enough premium to make the position gain slightly from standing still or going down slightly. So with an outright call I would be in a "hurry" for the move to start. With this position, I am fine sitting still as I am being paid to do so (albeit just a small amount).

Bottom line, lower breakeven point than an outright, make money sitting still, and still get to take part in the upside. In exchange for this, I give up some of the profitiability on a small up move (still profitable) but less so.

Fairly new to options, so may be the wrong way to look at this... It started from looking at a way to do an income capture in an IRA without needing to tie up all the capital holding long stock... then from there I didn't want to give up all the upside but still generate some income..
 
In my CAT position the 85 calls I just sold have about .40 in time premium, but they are in the money. When the time premium runs out, if they are exercised, will my 87.5 calls be used to satisfy that? How does that work? This is in a IRA account. What would happen to the premium remaining in my 87.5 calls? I know I should know this, but still fretting through this position..
 
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