Buyers have found their footing and are holding SPY above key intraday moving-average support. We’re taking this opportunity to place the following order:
Day limit order
Buy to open 2 SPY Nov 130 calls
Sell to open 2 SPY Oct 124 calls
Buy to open 2 SPY Nov 107 puts
Sell to open 2 SPY Oct 113 puts
for a net credit of $0.18 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 an equal dollar amount to each initial opening trade in a cycle.
Analysis: After all the back and forth over timing these past few weeks, let’s not forget that what every trade really boils down to is risk profile. There’s no “wrong” time to enter a position—just more, or less, favorable risk/reward propositions. With this trade, we’re setting up approximately the same risk profile as last month, selling a wide double-diagonal for a credit to start us out with minimal volatility risk and a greater than 50% chance of being profitable by expiration (before any adjustment possibilities are taken into account).
We’re gaining a slight advantage from forward volatility skew, but the bottom line is that this trade is virtually neutral with respect to delta and vega. The short strikes are also positioned to minimize gamma without crushing profit potential at the low point of the expiration P/L curve.
I think it’s safe to assume markets will remain volatile for some time yet, so this month’s plan, once again, is to hedge around a single core position in order to keep our total dollar exposure to a minimum and avoid whipsaw trading. Our initial projected risk-management price thresholds are approximately SPY $110.40 and $123.75.