Ok guys, you got me intrigued on the diagonals and as me being the curious nature always looking for new ways i spent some serious time researching it and here are my thoughts.
Sailing or anyone else -> here is my question and i will refer to your trade. From your post on 3/14/06:
For the current month!
Bought 10 May 1350c, Sold 7 April 1320c for even
Bought 10 May 1190p, Sold 5 April 1225p for even
If market stays stagnant... about 4% return, assuming no volatility change. Shorts expire worthless, long positions will retain some premium for profits.
Any movement towards short strikes... 5-15%
At strikes.... 15-25%
At lower put strike... with increase volatility... 30%
Beyond strikes.... . could even be better!
Love the risk profile of this trade.....
Now i am clear on the profit when the market stays the same, i am clear on the profit where we are slightly below or at your short(max profit for you). What i am not clear on is your statement that beyond the strikes(i suppose you mean above your 1350 strike?) it could even be better.
Here is what i see. If the market closes at 1350 at APR expiration you will lose roughly $4,000.
$21,000 loss on the short, that is the 30 point spread*7*100
$17,000 gain from the long, that is the $17 theta*10*100
=-$4,000
To break even at the long side you are assuming that the volatility will increase and bump up the at the money premium to $21+ per call with 4 weeks to expiry.
Regarding the put spread. I could see that breaking even at your long strike because the ATM premium on the 1190 Put needs only $17.5 theta(5*35point spread) at APR expiration and thats quite possible.
From your posts, you make it sound like adjustment won't be needed since you profit when we dont move, go to your short, long or even beyond your strikes.
The way i see it, you having more long calls then shorts won't give you unlimited upside as you said in one of your posts cuz your call spread is too wide or ratio too low. The way i see it, an adjustment is needed somewhere between the short and long strikes.
I looked at the current prices and i can get a 30 point diagonal spread at a 10:7 ratio like you did but i still dont see the profit at or beyong your long side. The only way i see it is if i lock in a 30 point spread at a 10:5 ratio but that seems impossible for even or a small credit.
I would have to say though that picking the ratio is the most important part of the trade and i'd say the goal probably is to lock in a tighter spread at higher ratio as possible. I'd say the 10:5 for 35 point spread is pretty good. Anything lower on the ratio(like 10:6,10:7,10:8) or wider on the spread will introduce more risk.
I will keep looking into it further, but i clearly dont see a win/win scenario where an adjustment isnt needed. You have had more experience with it so what am i missing? Have you had the price go through your long strike yet?
On a final note, i am starting to like this setup and may try it out next month if i can find the good ratios/spreads i mentioned earlier and lock in a small credit. But those 35 point spreads will KILL my margin.
I am not really a big fan of buying theta on turtles like the SPX.
