We’re adding the following Supplemental Trades position to our September KO portfolio:
Day limit order
Buy to open 2 KO Oct 60 calls
Sell to open 2 KO Sep 60 calls
Buy to open 2 KO Oct 57.5 puts
Sell to open 2 KO Sep 57.7 puts
for a net debit of $0.76 or better.
Note 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.
Analysis: With the addition of this double-calendar, we’re offsetting our base-position delta bias by about 9.9, or about 59% in proportion to total capital at risk (assuming equal allocation of risk across positions). Vega, as a percentage of capital at risk, increases marginally, from about 8% to about 8.5%.
This adjustment is fairly conservative, for two reasons: 1) We might roll our 57.5 call spread up to avoid assignment, and that would contribute quite a bit of positive delta to our portfolio; 2) KO is near major resistance at last fall’s high, which increases the probability of at least a short-term pullback. (As I’ve noted before, the Calendar Options strategy doesn’t depend on technical analysis…but it doesn’t hurt to take advantage of any and all possible advantages.)
The graph below shows the P/L curve for this trade…
…and here’s our portfolio risk profile after the trade:
Note that the premium in our short Sep 57.5 calls has dropped well below Monday’s $0.44 dividend, so we may have to roll those contracts to avoid assignment. I’ll post an update this afternoon.
*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.