…but sometimes profit comes too quick…
With calendar and diagonal spreads when the underlying moves to the short strike too quickly you don’t maximize your profits. In a perfect world these ‘time spreads’ would move to the short strike on expiration day!
APC is down 6% as I’m writing at $41.97, and has blown past my short strike of $42.50. When these spreads move to the short strike quickly (less than one day in this case) it is my policy to take at least half off for a profit.
I don’t feel as pressed with a diagonal spread versus a calendar to take my profits as the diagonal usually has more favorable result to the downside whereas the calendar will start to lose money past the short strike.
In this case I took off half, ten contracts, for a credit of $2.80. I’ll wait and see if either I make some more on the long theta of my Jun options or an increase in IV of my long Jul options.
As you can see from the below Thinkorswim analyze tab (click to enlarge) at the current price I have a nice profit but I’m also still short delta (white line increasing profit to the downside) that peaks around APC $38.
Additionally, Theta is working in our favor and so is our long Vega as the long Jul options will benefit from increase IV as the market goes down and the longs buy puts to protect their positions. (To regular VolTrader Blog readers I probably sound like a broken record when I refer to the longs buying protection 🙂 )
*Educational and discussion purposes only, not trade recommendations.