Hello All, we are following up with our diagonal trade this week. Last week we talked about our good fortune of being able to get into our diagonal trade even after missing out on it the first time because we used a limit order which is ok because most of the time we are more concerned about getting our price than get stuck in a trade or getting a bad fill.

Now that we are in the trade we have to navigate the trade waters and that can only mean a few things. The stock is going to go up, down, or sideways or a combination of any of these and this means we can get excited, we might be bored or we might get a little anxious. We will discuss all three possibilities and what they may mean to us and then we will take a look at the trade and see where exactly we find ourselves on this particular sliding scale of emotions.

Let’s start with the fun part first. We chose this strategy because it can give us the best of both worlds from a trading perspective. There are many different types of traders but I would think the two most prominent types are cashflow traders(theta) and directional traders(delta). We have chosen a trade where we can benefit from both. We may not do as well as a straight directional trader might if the stock goes in the exact right direction but we trade a little of that gain off for the added benefit of not having to be exactly right on direction and timing. We also may not do quite as well as a straight theta trader but we will still benefit from the passage of time as it can reduce our original risk as well as provide profit depending on general directional movement. So the fun part of this trade is that in which the market goes in the direction we chose, which in this case we chose to golong as thats what the primary trend was telling us to do. If CROX starts to go up we are going to see a couple of things happen. First, we will see the short term OTM option will have a negative balance, fun right? Just kidding that’s not the fun part, this is the fun part. The long dated option will have a positive balance which is greater than the negative in the short option and this spread is the profit we are making. That is definitely fun!

Now, let’s talk about being bored to tears. If the market goes sideways we are not going to benefit from the directional standpoint we took but we will watch the positive theta drip go to work for us. This for most people can be boring because when theta starts it is a very slow drip but over time that drip gets faster and larger and then can make things slightly more exciting.

Finally, we may get a little anxious when these trades go against our original direction. If this is the case we need to remind ourselves of the benefits of this type of trade. We don’t need to be exactly correct on the direction and we already talked about what happens if the stock trends sideways and even if this goes a little lower then we just collect the time decay. However, if this starts to fall aggressively then we can start to see a debit in the overall trade and this can cause upset to some folks. We need to plan for this scenario before putting the trade on as the decision to be made here needs to be made without emotion. We need to do one of two things here, we need to either have a point in this trade that we close the trade and take a loss or we plan to sell credit until the trade ends and reduce as much risk as possible. We will delve into these two different scenarios in the coming weeks as these subjects are vast in scope and need their own attention.

So as one can see these trades as great as they are have the ablility to push on our emotional levels and we need to be prepared for that. Take a look at this weeks short video to see where we are now and where we expect to go in the near future.

Trade Well,

Coach “Old Money” Holmes