There’s been no change in the KO September 57.5 call premium, so we’re selling the call calendar and replacing it with the 57.5 put calendar, as follows:
Day limit order
Buy to close 2 KO Sep 57.5 calls
Sell to close 2 KO Oct 57.5 calls
Buy to open 2 KO Oct 57.5 puts
Sell to open 2 KO Sep 57.7 puts
for a net debit of $0.12 or better.
Note, again, that 2 contracts is our base position for double-calendars. Trading whole-number multiples of the base size ensures that adjustments will not result in unbalanced positions. Also note that an equal-risk allocation approach is needed to match our Model Portfolio risk profile. And of course, members who have no open position in the KO Sep/Oct 57.5 call spread would not place this order.
Analysis: This trade affects our portfolio risk profile mainly on the basis of volatility skew, most of which will be washed out on Monday (ex-dividend). For what it’s worth, we’re decreasing our theoretical delta from 6.9 percent of total capital at risk to 5.3%, and shaving vega from 8.3% of capital risked to 7.9%. The key point of this trade is that we’re dodging any chance of being assigned in advance of the dividend.
Here’s our P/L curve after this trade :
Our projected probability of profit is more than 58%, and we’ve shifted our upside breakeven up by almost $0.20, to about $58.78.
*NOTE: As a Supplemental Trade, this trade is optional and is primarily intended for more experienced/risk-tolerant subscribers. It will not be autotraded, and it has no bearing on our core newsletter portfolio; however, we will follow up by posting any additional entry or adjustment trades that the Calendar Options risk-management approach may call for. Also note that it’s important for anyone who chooses to participate in Supplemental Trades for a given cycle to follow all Supplemental Trades in that cycle, in order to match our risk-management profile.