Options Strategy Drawbacks?

[minmike]

Quote from rmarvin001:

I have been trading options for the last two years and have recently started employing a reverse diagonal spread strategy in sim mode. In my virtual trading, I have been quite successful and am thinking of employing it live. What are the drawbacks of this strategy.

An example for all to comment on follows:

XYZ Current Share Price: $100

Buy 500 Jan $130 Calls @ $0.82
Implied Vol: 57.5

Sell 500 March $155 Calls @ $0.86
Implied Vol: 52.6

Typical Volatility is low 40's,upper 30's. Earnings are to be announced in December.

The trade (excluding commissions) nets an initial credit of $2,000. ($43,000 versus -$41,000)

It appears that there is limited downside risk and incredible upside benefit, especially with a blowout earnings report. If you were to have an exit date of between 12/24 and end of the month, it is hard to see how you could lose much, especially when considering the upside potential.

Thoughts?

You have it backwards. tons of risk with little reward. Have you run if nothing changes, (vol/stock price) how much you will lose at expiration on this position?

 

[5xBEAR]

Quote from noob_trad3r:

Why not do what I do. I sell puts on GE and SPY

and if I get assigned then I sell calls on them.

I keep it pretty simple.

That's ok... but for most individuals, the margin requirements are pretty hefty on naked positions.