We’re opening the following Supplemental Trade position for May expiration:
Day limit order
Buy to open 2 XLE Jun 80 calls
Sell to open 2 XLE May 78 calls
Buy to open 2 XLE Jun 73 puts
Sell to open 2 XLE May 75 puts
for a net debit of $0.34 or better.
Note that 2 contracts is our base position for double-diagonals. Trading whole-number multiples of the base position size ensures that adjustments will not result in unbalanced positions. In addition, in order to come as close as possible to matching our Model Portfolio risk profile, it’s important to allocate risk equally across each initial opening trade in a cycle. Also note that as a Supplemental Trade, this order will not be autotraded.
Analysis: Our search for Supplemental Trades is still turning up surprisingly few candidates, especially when we eliminate stocks with upcoming earnings. XLE currently meets all of our selection criteria, but the implied volatility of XLE options is at the high end of our entry range—which is why we’re adding a vertical component to this trade (creating a double-diagonal) to reduce vega risk.
In order to achieve a neutral delta stance, we had to make this an unusually narrow double-diagonal. We’re taking on a little more gamma than we initially have with our standard double-calendars and double-diagonals, but we also have a little faster time-decay—and, this is an opportunity for members to start getting a feel for straddle-strangle swaps.
A straddle-strangle swap is where we sell the front-month calls and puts at the same strike and limit risk in the back month with long positions farther out of the money. This is a strategy I’d eventually like to delve into for veteran members who want to go beyond the trades they’re already familiar with. For now, though, we’re only dipping a toe in that water with this relatively narrow double-diagonal.
Before I get to the numbers, here’s a look at our risk profile at the time we were filled:
Our projected breakevens give us an approximate probability of profit in the 45%–50% range without any additional offsetting or adjustment trades. The risk-management price levels (projected adjustment points) to keep an eye on are initially around XLE $72.20 and $78.40. As always, we expect to add more positions if the shares make a significant move in either direction.
NOTE: Supplemental Trades are optional and primarily intended for more experienced/risk-tolerant subscribers. They are not autotraded, and have no bearing on our core newsletter portfolio; however, we 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 if they wish to match our risk-management profile.