This trade was posted January 27, 2009.
Diagonal Spread Example:
Sell GGBBU Feb 2009 7.5 Call $0.35
Buy KDMAZ Jan 2010 2.5 Call $4.40
Net Cost $4.05(+Trading Costs)
Maximum Loss $4.05(+Trading Costs)
GGB is trading for $6.54 at the close on Tuesday 01/27/09
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GGB is now trading for $4.85 on Tuesday 03/17/09.
Sell GGBDA April 2009 $5 Call $0.40
The KDMAZ (Jan 2010 2.5 Call) is now trading for $2.65.
Net Cost $3.65(+Trading Costs)
Maximum Loss is now $3.65(+Trading Costs)
If this option is exercised we will have a loss of $1.15 (+ Trading Costs) on this Trade Idea, if this option expires we will look at the next trade. For this trade, we have had the worst scenario for a Diagonal Spread, which is the underlying stock (GBB) has declined dramatically (almost 26%). If GGB stays below, but near, $5 we should be able to salvage this trade, provided it’s fall does not continue.
————————————————————————————————————————– GGB is now trading for $5.06 on Friday 03/20/09
Buy the GGBDA April 2009 $5 Call $0.10
Maximum Loss is now $3.75 (+Trading Costs)
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GGB is now trading for $6.88 at the close on Wednesday 04/22/09
Sell the GGBFU June 2009 $7.50 Call $0.45
Maximum Loss is now $3.30 (+Trading Costs)
If this option is exercised we will have a gain of $1.70 ($7.50 Call sold exercise – $2.50 Call bought exercise – $4.40 Call cost + $0.35 Call sold expired + $0.40 Call sold – $0.10 Call bought back + $0.45 Call sold that was exercised). This would produce a return of 42% ($1.70/$4.05) in 6 months not including trading costs. Assuming $0.15/trade/per share (which is conservative), 4 trades = $0.60 trading costs, the return is $1.10 or 26% in 6 months. We are still hoping that GGB does not trade above $7.50, yet and, we will be able to sell more options from now until January.
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