May Diagonals

'Tis the season for lining up my diagonal options spreads for May. I spent 90 minutes doing the research on Saturday, with Metallica blaring in my ears. (I find that Meticallica gives an edge in trading performance.)

For most of my holdings, beginning Monday I'll roll the short options expiring in April over to May expirations. Those holdings are AAPL, DFS, INTC, QCOM, QQQ, STX and WDC.

I'll close two of my diagonals. The prices have moved in a way that make it impossible to create profitable positions with acceptable risk. So both the long calls and the shorts will be closed for EFA and IWM.

Those closures and my profits provide space for several new diagonals. As always, I'm looking at stocks having average volume of 3 million shares or more.

I'll buy the call options expiring in August, or the nearest month after that if there are no August options, selecting the strike having a delta of 70.

I'll sell the May calls having a delta between 30 and 40.

In any case, I'm looking at stocks having favorable analyst ratings and with uptrending charts, and I want the diagonal to have a risk/reward ratio of no greater than 4:1.

My short list of possibilities, based on Friday's close: LEN, LNKD, QCOM, SBUX and WFC.

After opening the diagonals, I'll immediately insure them by buying out-of-the-money puts. The question, as always, is how much insurance can I afford?

Generally, I look for a put having about a quarter of the delta of the long call and expring in the same month. The cost of insurance will generally be almost as much as my first month's income from selling a call, but since I get to sell several times and only need buy insurance once, it works out be profitable.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.