put’s strike at expiration; a breakeven price of
the higher put strike minus the credit; and a
max potential profit of the credit if the stock
is higher than the short put strike at expiration, not including commissions. You might
consider short put verticals for a bullish
strategy when the stock’s vol is higher.
The amount of money you need to establish a short put vertical is the difference
between the strikes minus the credit. The
capital requirement for a short 190/195 put
vertical on a stock trading at $200 might
be $300, while the capital requirement on
a 96/98 put vertical on a stock trading
at $100 might be $140. Again, you
could potentially have a portfolio of short put verticals in 20
individual stocks at different
price levels with a total
capital requirement (not
including commissions) of
less than $5,000.
A long call diagonal is a long at-the-money
(ATM) or in-the-money (ITM) call in a
further expiration, and a short OTM call in
a closer expiration that carries a debit. It’s
another bullish strategy, with a max risk
of the debit paid if the stock is below the
strike price of the long call at that long call’s
expiration. Because of the potential to roll
the short front-month option to a further
expiration and take in a credit to reduce the
diagonal’s net debit, the breakeven price and
max potential profit aren’t
always defined. Yet, without
any rolls, the diagonal has
a profit of the difference
between the long call strike
and the short call strike
minus the debit, if the stock
is higher than the short call
strike at its expiration, not
including commissions. You might use long
call diagonals as a bullish strategy when the
IV of the long call is lower, and the IV of the
short call is higher. This can happen around
earnings or news events.
The debit of a long call diagonal depends
on the stock’s price. For example, looking
at long calls with 90 days to expiration, and
short calls with 30 days to expiration, the
debit on a long 200/205 call diagonal on
a stock trading at $202.50 might be $450,
while the debit on a long 100/102 call verti-
cal on a stock trading at $101 might be
$290. The capital requirements for
diagonals can be higher than for
long call verticals or short put
verticals. But you can think
of long call diagonals as a
alternative to covered calls
(long stock and short call),
where the long option takes the
place of the long stock.
Consider two caveats. Using option
spreads instead of stock means you don’t
collect any dividends. Plus, you have to
deal with rolling, or closing these spreads
at expiration, which can incur extra commissions and fees. You might also have to be
more attentive to option spreads than long
stocks. But the lower capital requirements of
spreads means you can potentially create a
more diverse portfolio than with long stock.
Like everything in trading, it’s a trade-off.
ADD A PERSONAL TOUCH
Being your own portfolio manager in some
sense means looking at your assets together.
One feature of the thinkorswim® platform
from TD Ameritrade is the ability to see
all your positions—stocks, options, funds,
futures—in one display. By default, you’ll see
all your open positions in the Position Statement section on the Monitor tab for a single
account (Figure 1).
You can see all positions from multiple
accounts, like margin accounts, IRAs, and
joint accounts, by selecting “All Accounts”
from the dropdown menu at the top of the
SO, WOULD YOU LIKE TO PLAY “POR TFOLIO
manager”? You can experiment with option spreads to create a portfolio using a
small percentage of your total assets and
compare its performance to other products. It’s all about having choices, being
realistic about the size of your trading account, and finding ideal strategies relative
to available capital.
Thomas Preston is not a representative of
TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the
author and may not be reflective of those held by
TD Ameritrade, Inc.
Options are not suitable for all investors as the
special risks inherent to options trading may expose
investors to potentially rapid and substantial losses.
For more on the risks of trading and trading options,
see page 37, #1– 2.
FIGURE 1: Position Statement. From the Monitor tab in thinkorswim, you can get an overview of all your open
positions and all positions in all your accounts. Source: thinkorswim® from TD Ameritrade. For illustrative purposes only.
Options credit spread: Maximum potential reward
for a credit spread is limited to the net premium
received, less transaction costs. The maximum loss
is the difference between strikes, less net premium
received, plus transaction costs.
Options debit spread: Maximum potential reward
for a debit spread is limited to the difference between strikes, less net premium paid. The maximum
loss is the net premium paid and transaction costs.
Rolling strategies can entail substantial transaction
costs, including multiple commissions, which may
impact any potential return.