what are the risk of this combo?

[newguy05]

Open the position at the final week of the front month expiration

Long backmonth atm straddle
Short frontmonth otm strangle x strikes out

Basically profit 1) theta decay 2) movement of the underlying.

What are the risks? the ones i can see are

1) significant IV drop (assuming under normal condition when backmonth has higher vega exposure)

2) underly gaps out of the spread range, your backmonth straddle will lose most of it value from 1 side while the other side's profit gets capped by the short frontmonth thus making it a loser overall.


Are there any other risks? it looks to be a relatively safe combo to play the earnings (with the frontmonth expiration week = earning release) or in general?

 

[rosy2]

your long 2 diagnol calndar spreads

 

[donnap]

Quote from newguy05:

Open the position at the final week of the front month expiration

Long backmonth atm straddle
Short frontmonth otm strangle x strikes out

Basically profit 1) theta decay 2) movement of the underlying.

What are the risks? the ones i can see are

1) significant IV drop (assuming under normal condition when backmonth has higher vega exposure)

2) underly gaps out of the spread range, your backmonth straddle will lose most of it value from 1 side while the other side's profit gets capped by the short frontmonth thus making it a loser overall.


Are there any other risks? it looks to be a relatively safe combo to play the earnings (with the frontmonth expiration week = earning release) or in general?

Hey newguy,

I think that you covered it pretty well. You may prefer a low IV entry. Higher initial IV is riskier.

With earnings, you may have the skew in your favor, although that can be relatively meaningless with inflated IV. The backmonth contraction, though smaller IV wise, is magnified by time.

Profits may be fairly limited and fleeting. Perhaps this trade would produce more BEs than you'd like, but it looks OK.

OK, I don't know if that covers everything - where's a smiling giraffe when you need one

 

[spindr0]

Double diagonal can also have "no movement" risk if distance b/t strikes is wide since 1 week OTM strangle will bring in little (theta decay of weekly will not offset that of the straddle).

Tough position to make money for earnings unless near month large skew and far month IV not grossly above historical.

 

[newguy05]

Going to test this out with a small position (~$5k). I usually dont like to play with those expensive options but atticus got me hooked on goog.

+ BOT 2 GOOG MAY 20 '11 580 Straddle 44.20
+ SLD 2 GOOG APR 15 '11 + 605 Call + 555 Put Strangle 10.8

position has 1.1 theta and 1 vega currently. and a huge skew (frontmonth IV ~45 vs the backmonth ~28 )

looking to close this out on wed, then possibly rebalance/reopen to atm going into thurs earning.

 

[Eliot Hosewater]

Is this free money?

GOOG double diagonal for 21.90 credit

575 - April put (Monthly expires 4/16)
580 + April2 put (Weekly expires 4/9)
585 +April2 call (Weekly)
590 - April call (Monthly)

TOS P/L chart shows minimum $120 profit at first expiration (i.e. today's close).

 

[spindr0]

Quote from newguy05:

looking to close this out on wed, then possibly rebalance/reopen to atm going into thurs earning.

Good skew but you may have problems closing this for gain by Weds if front month IV continues up. Also a problem holding thru earnings if May IV drops to historical (low 20's).

 

[newguy05]

Quote from spindr0:

Good skew but you may have problems closing this for gain by Weds if front month IV continues up. Also a problem holding thru earnings if May IV drops to historical (low 20's).

Yep but am hoping the theta decay will be more. It will be interesting to see how it all turns out next week.

Will see if it's worth it to hold through earning next wed

 

[Eliot Hosewater]

Quote from Eliot Hosewater:

Is this free money?

GOOG double diagonal for 21.90 credit

575 - April put (Monthly expires 4/16)
580 + April2 put (Weekly expires 4/9)
585 +April2 call (Weekly)
590 - April call (Monthly)

TOS P/L chart shows minimum $120 profit at first expiration (i.e. today's close).

Damn! I put on 20 of these in paperMoney, closed out the short 575 put at 12 (from 11.20), and am up 1.32 already.

Shoulda used real money.

The margin requirement was pretty hefty.

ETA: closed out for 1.90. It still would have been interesting to see how it would have performed if GOOG hadn't moved before expiry.

 

[galvinlee888]

Quote from Eliot Hosewater:

Damn! I put on 20 of these in paperMoney, closed out the short 575 put at 12 (from 11.20), and am up 1.32 already.

Shoulda used real money.

The margin requirement was pretty hefty.

ETA: closed out for 1.90. It still would have been interesting to see how it would have performed if GOOG hadn't moved before expiry.

PaperMoney ?