The Dow has repeatedly found support in the 8390–8400 range this morning and is starting to rally again. We still have significant negative delta in our DIA May/June double-calendar, so we’re going to lock in our current 6.8%* profit, as follows:
Day limit order
Buy to close 2 DIA May 78 puts
Sell to close 2 DIA June 78 puts
Buy to close 2 DIA May 85 calls
Sell to close 2 DIA June 85 calls
for a net credit of $2.97* or better.
Note that the 2 contracts per leg above represents our entire position.
*Average of two fills.
Analysis: As we observed Sunday night, strong rallies can end with panic buying, and we’ve been keenly aware of that possibility heading into expiration. We’re seeing consistent buying interest at the 8390 level in the Dow, and DIA has come off a second test of support at $84 and broken up through its 50-minute moving average. We don’t want to see our 6% profit—though relatively modest for a calendar position, significant nevertheless, considering that we’ve been in the trade for less than a month—disappear in another sharp upsurge like the ones that have followed every pullback in this rally. The market could well go lower, but it’s important to put risk-management ahead of the outside chance of nabbing a higher return.
The market did, in fact, turn down abruptly the minute we sent out the e-mail alert for this trade. Autotraded orders and our initial lot of contracts were filled immediately at the original limit price of $2.95. But any member who wasn’t poised to pull the trigger at our minimum price the instant the alert arrived would quickly have gotten filled at $2.97, and we had no trouble closing the remainder of our position for $2.99. As a rule, we use the most conservative fill when calculating our performance; but in this case, it was hard not to get a better price—which is why we’re officially logging the average of our original alert limit and our second fill.
However,…lest anyone regret not holding out for a higher price, it bears mentioning that buying interest picked up right after 1:00. Not long after DIA rallied back to where it was when we set up this trade, the kind of sharp upsurge we wanted to protect ourselves from actually did materialize. The share price quickly shot up through our $85 adjustment trigger, erasing more than half of the profit from the position. Calendar Options isn’t a directional trading strategy, but the strategy does include managing risk by, among other things, locking in gains at the first opportunity if we end up with a strong directional bias in the last few days before expiration.