Quote from Sailing:
July/August Diagonals at Expiration, July 20, 2006
Well, Friday is going to be a sailing day... so here are the numbers upon close today. I'll use 'mid' for remaining values for reference sake. Positions were placed approximately when market was at 1265ish. SET will have some effect on one position possibly... although looking like positive open for tomorrow on MSFTs earnings... etc.
Position #1
STO July 1195p - $7.50 STC July 1195p - expired
BTO Aug 1175p - $9.70 BTC Aug 1175p - $4.60
Profit = $2.40 on $20 margin or 12.0%
Position #2
STO July 1225p - $11.80 STC July 1225p - expired
BTO Aug 1200p - $13.20 BTC Aug 1200p - $7.30
Profit = $5.90 on $25 margin or 23.6%
Position #3
STO July 1250p - $20.00 STC July 1250p - expired, pending SET
BTO Aug 1230p - $20.90 BTC Aug 1230p - $13.20
Profit = $12.30 on $20 margin or 61.5%
Position #4
STO July 1305c - $6.20 STC July 1305c - expired
BTO Aug 1325c - $6.80 BTC Aug 1325c - $0.55
Loss = $-.05 on $20 margin or -0.2%
Overall: $20.55 on $85 margin or 24.1% return
Because position #2 was more heavily weighted in contracts, the real return was 24.8%
Summary:
You may want to look back at my previous post and examine how values in positions #1 and #2 changed in two days as the market moved 20pts against the positions.
Our experience trading Credit Spreads over the past two years vs. trading Diagonals over the past four months has been interesting. We feel if playing volatility, VEGA, is in your market outlook plan (May-Oct), then the choice is obvious, Put Diagonals. On the otherhand, if you have a more positive outlook on the market (Nov-Feb) then Put Credit spreads tend to be the choice. If you have a nuetral or range bound outlook, then Double Diagonals (both puts and calls) would be a wonderful option.
We have placed Double Diagonals for the past four months... the Puts have been the money winners by far... for obvious reasons.
Pro's & Con's
Credit spreads just don't allow you many, if any adjustments. Some people hedge... I look at hedging as limiting even more your position if you're right in the trade.... minus risk managment. Credit spreads, if they move against you, literally drive you insane as the potential risk-loss mounts up.... we've all been there. Call Credit Spreads do avoid the 'black swan' event as eluded to many times here.... Put Spreads though do not! Credit Spreads are easier to show and explain to someone... and the profit/loss is defined. Easy to define 100% loss. They also nuetralize volatilit. So.. if the market is screaming with volatility, as it was Monday & Tuesday, you could take advantage of this with Credit Spreads... allowing you to go further out of the money for premium.
Diagonals love increasing volatility. They profit best when applied in lower volatility conditoins, expecting increases later in the month. You would not want to apply diagonals in high volatile time periods, unless you're expecting volatility to continue to increase. Diagonals do offer many adjustments... ie, butterflies, unbalanced flys, bull puts/calls, and credit spreads (without fighting b/a) and reverse calendars. Diagonals do not have a fixed calculated profit or loss per say... as your profit/loss is largely determined by the amount of premium left in the next month out. The real advantage here is... you have many adjustments or choices and your account doesn't scream RED at you. In fact, the majority of the month.... even during major market moves... your account doesn't fluctuate much. This occurs because of the dynamic movement of both months positions moving relatively the same... it's the last week, when all the premium in the short MUST dry up... while the long retains it's own Time value. You can play the diagonals as a DELTA/THETA position... but I think you'll be much more successful if you look to LONG VEGA instead.
Feel free to comment... suggestions always appreciated!
Murray
The Grand Rapids Investment Club
Again, it's good experience for me first fly expiry, strange beasts, they are. I'm not real big on low prob. lottery like return. I'm sure one correct fly pin will change my mind 
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