APC update – profitable diagonal spread

APC is down an additional $1.30 today.  I just took off an additional 5 contracts for a credit of $2.90.  Yesterday I took off 10 contracts for a credit of $2.80.

This is a good example of how I exit this type of trade.  It’s very tempting to look at the profit at expiration and leave these trades on when they are working in your favor but I’m sure a lot of you can relate to the frustration when the trade goes your way early and then closer to expiration moves away from the short strike erasing profits or even turning a winning trade into a loser.  Trust me, I know that feeling way too well.  I’ve become good at removing these trades in pieces and taking smaller profits.  If you’re beginning and only trading one lots, I’d recommend taking the whole trade off for profits when you can, or if you can tolerate the additional risk, trade two lots, and taking half off for profits.

Below is the current P&L for this APC trade.  I still have 5 contracts open and have entered a limit order to sell them for a credit of $3.05. (Click to enlarge)

You can see the underlying is below the short strike… time to get out.

image

As I was publishing this post, the remaining 5 contracts executed, sold for a $3.05 credit.

Summary: bought 20 spreads at $2.35 on 6/7/2010.  Sold 20 contracts 6/8 and 6/9/2010 for average of $2.905. $0.555 x 2000  = $1,110 profit on margin requirement of $1,500 (portfolio margin at Thinkorswim).  My calculations show that’s a 74% gain.  Not too shabby for two days.

3 Responses to APC update – profitable diagonal spread

  1. Hi,

    Great trade!

    My question is more in terms of your approach to trading. Per my understanding, when entering the position (like APC), you are betting on one or both of the following eventualities:

    a. IV converges between different months/strikes
    b. Stock moves lower

    What is your basis to believe that either or both of the above will likely happen? Is it not equally likely the the IV may diverge or the stock may move up?

    Sorry, if you have answered these questions in any of your previous entries. I really find your trades fascinating but just want to better understand your style and approach.

    Thanks,
    Sandeep

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