I’m expecting a grind up in SPX over the next 2 months so I’m layering on mostly inexpensive positions (and a few expensive ones) in multiple Fri/Mon expirations to add size and build a position. Below is my current position as of Dec4.
I’ll likely be adding the trade below at some point in the next day or two. I’d like to buy it for a small credit if possible but I’d be willing to pay up to a $.20 debit if that’s the best that I can do. This is a perfect example of a bearish/bullish trade. If SPX goes up quickly this position would actually be losing money but, over the next 3 weeks, this is a bullish position.
My current position covers the upside risk of that Dec20/23 short Double Diagonal because it’s long Deltas so my overall position would still be bullish. The margin requirement on these positions reflects the upside risk. I only do these types of short Call Diagonals on SPX. If I were to do this on a stock and price jumped 5% or 10% due to an earnings announcement or some sort of other bullish development the position would take a huge loss. This is the perfect trade for a grind higher!
If I wanted to take no additional downside risk on my combined position I could split that Dec23/26 position that I’m considering into 2 different Double Diagonals; 1 where both short Diagonals are 5-points wide and the other Double Diagonal where 1 is 5-points wide and the other is 10-points wide. If I did that I could add both Double Diagonals for a net cost of $0. That’s just another possibility to consider but I would likely wait at least until tomorrow because adding these now would reduce my long Delta position by more than I would like at this point. I’ll keep this on the backburner for now.
2 trades placed today. First was for a $5,000 debit and the second was for a $4,000 credit so I added $1,000 to my net downside risk.
This is now my current position.
Below is the SPX options chain that I’m currently using to estimate the approximate potential profit in all of those time spreads.
12/7/24 Update: Looking over my positions on the weekend and preparing for the week ahead. If there’s going to be any SPX weakness over the next 30-40 days it’s likely to occur this coming week although it could extend into the following week also. I’m still focusing on bullish trades and hedging my downside risk by adding short Call Diagonals that I’ve added to my position for a credit. Below I’m going to focus on how the biggest positions over the next 2 weeks interact with each other. First, here’s the excel spreadsheet of those positions. I own a 50-lot of Dec6/9 Call Calendars as well as 2 short Call Diagonals in the Dec13/16 expiry. Take a look and I’ll continue down below.
I spent $1 each for the OTM Calendars which is relatively cheap but if SPX moves down next week that could be a $5,000 loss. I don’t like $5,000 losses if price doesn’t do what I expect it to! That’s why I bought the short Call Diagonals in the following week’s expiry for a $4,000 credit. Now my total downside risk is $1,000, not $5,000. Here is the risk profile of those positions.
So my downside risk is $1,000 and my upside risk is $101,000 but, as time advances, the risk profile steepens meaning SPX would have to rally by over 2.% by Monday’s open to have even a small loss. In order to have a substantial loss SPX would have to rally close to 3% by Monday. Those are the risks I’m willing to accept under these circumstances. If price was coming off of a big decline and there was a potential news event that could trigger a strong move up I would not hold this type of position! Using the risk profile that was shown above, if SPX is at 6200 on Friday’s close, the position would be worth around $50,000-$60,000. Since my total cost is just $1,000, if SPX is above 6150 (50 points OTM of the 6200 Calls), the position will show a profit. So anywhere between 6150 and about 6220 on Friday makes money.
Now what happens after the Dec13/16 expiry? At that point the Dec20/23 position becomes the current week. Below I’m showing what the risk profile of that position would look like (approximately) as trading begins on Monday Dec16. I have no downside risk in that position because it was bought for a $1,000 credit so the least I can make is $1,000. The potential maximum value of the 10-point OTM Monday Call will likely be around $7 at Friday expiry so if SPX is 6190 at Dec20 expiry then the 6190/6200 short Call Diagonal will be worth around $35,000. Add in the $1,000 credit I received when I bought the spread and the total profit will be around $36,000. If SPX is moving above the 6200 strike I may exit or downsize that position and keep the 6240/6250 short Call Diagonal which should have that $36,000 profit if SPX is 6240 at Dec20 expiry. You see how these positions work together? I’ll update again later in the coming week.
As always, this post isn’t trading advice for anyone! This is a complicated strategy for someone not experienced in this method of hedging risk but once the concept is learned it is actually quite simple. Use a future position to hedge a current position. This is also an intensive margin requirement position due to the upside risk. A smaller account could use SPY or XSP to trade the strategy but, having said that, this is simply the best way for me to trade my portfolio in this current environment and, again, this isn’t trading advice for you! Learn from it, improve upon it or discard it completely. That’s up to you to decide. That’s it for now. If you have a question or comment, leave it down below and I’ll answer as soon as I can.