Rolling HPQ Straddle with Double Diagonal Order

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Straddle: In tonight's video, we're going to go over all the trades that we made on Tuesday, January 12th. The first thing that we're going to start off with tonight is the last trade that we made today, and that's trade in CMG. What we did has we had the original iron condor here in CMG and since the stock has collapsed in the last two weeks..

Here's the stock chart. You can pull this up right inside of the Option Alpha platform here in the trade tab. You can see our strike prices on our original trade were about 495 on the put side and then above the market about, I think it was 560 or so, or maybe even higher than that, but you can see the stock has collapsed in the last two weeks or so.    

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Thank god we have the iron condor instead of a strangle or straddle, which helped us out in this case because it was risk defying. What we did do is close out of just the put vertical spread that was on the money. Here's the key to this, and there are only three days until expiration.

I got a lot of people emailing me saying, well, why don't I just let this thing go to expiration because it's basically at a max loss, let it go to expiration? The problem is is that any options that are in the money at expiration are going to be automatically assigned by your broker, and if that happens, that's not necessarily a bad thing.

You have the 495 puts and the 490 puts, so you're still going to end up losing the difference between those two, but what you're going to miss out on is the additional commission that most brokers charge for exercise.

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I know the way at think or swim, you usually pay $15 for an exercise of a contract versus maybe the dollar and 25 cents or $1.50 that you pay to close it out. Double check with your broker, but I'm almost positive that in almost every situation you're going to pay more to let these options go to expiration and be exercised than if you just got out of them.

That's one reason why we are confident in paying just a little over market value, and sometimes you have to do this. We've done this a couple of times, where you pay $2 above, in this case, we paid $5.02, true fair value at expiration is $5. Okay, so we paid $2 more because we wanted to save the $30 in a commission that we would've spent going through the exercise process for each of these, and then we're just out of the trade.

For all intents and purposes though, after all, adjustments and everything, what's left on and the call side, we're going to assume expires worthless [inaudible 00:02:21] the money. We end up losing $3.42 on this trade. Saved our trade another $50 by making the adjustments that we did that helped out.

Could have done it a little bit sooner in hindsight, but at the end of the day, who knows where this thing was going to go. Ends up being a loser, but not as bad as what could have been if we didn't have the iron condor. Had a new opening trade today in OIH. The World continues to be a big theme because implied volatility is high, so in oil, we went ahead and did the 70% probability of success strangle.

That again is selling at 26 calls and selling the 19 puts. Turned into a nice little credit of 53 cents on this one. Again, it just adds to the positions that we already have in XOP and USO. We're continuing to build a nice portfolio of high implied volatility oil type related trades. We've got across the board six or eight contracts in all of these different things, so I like what we're starting to do, and we've still got a lot of room to grow here.

With OIH, you have a chart here you can see little bit of a bigger down move than some of the other securities like USO, but definitely that nice rise in implied volatility, so at least at this point, our goal is just to hopefully see oil at sometime between now and February expirations, we got a little bit of time here, see implied volatility drop or the stock continue to move sideways to slightly higher. That would be the ideal situation here with OIH.

Then the earlier trade that we made right after the open is the HPQ diagonal. This one confused people a little bit, but I think if you actually took the time to actually come back here to the trade tab in the trade page here at Option Alpha and actually look through the order, it's very, very simple.

Don't get confused by the term diagonal or double diagonal. All it means is that we're crossing between one expiration month to another. We're diagonally moving our position across the calendar. In this case what we did is we basically just did two separate things and we did them as part of one order.

The first thing that we did is we closed out of our current straddle that was sitting over the top of the market at the 12 strikes for January, so we bought back both the 12 calls and the 12 puts. Then the next part of the order ... And again, we just did this in one order. You could have done it in two if you wanted to.

The next part of the order is we sold new straddles in February this time at the same strike price. Notice our strike price didn't change at all and we sold out the February options, and again, it's just two contracts apiece. All we did is close out January and then re-establish in February.

If you wanted to do this as part of a new trade ... Here, let me show you how you would do this as part of a new trade. If you had, let's say, HPQ now, and you have that straddle, all you do is you go in here, and you go in here and right click, create a rolling order and then say double diagonal.

What it's going to do is it's automatically going to pop up this double diagonal screen. The key here is that it's going to default to the next available contract. In this case, it's going to fall to weeklies, and I'm not saying that we're rolling it from February, but I'm just showing you as an example.

All you have to do here is just change this first contract to March, and you can see now if we were to roll it today from February to March, we would get a $35 credit to do so. It's very easy to do this in one full swoop. Think or swim makes it incredibly easy to roll these contracts to the next month.

Hopefully, that helps out a little bit with HPQ, but again, take your time on some of these orders, and if you don't understand them, you don't have to rush through them. There's usually plenty of opportunities to make an adjustment to trade. It's not like if you miss it in the first hour or two hours or even today that you can't do it tomorrow.

Take your time with some of these trades. Use this trade tab page as a resource for you. That's why we built it. That's why we spent so much money trying to develop this thing for you, so it had all of the buy sides, sell side, the position-effect, to open, to close, the contracts, the expiration, the whole nine yards.

There's everything that you need in here and nothing that you don't. Hopefully, you guys enjoy this video. As always, if you have any comments or questions, please ask them right below inside the comment box on this page, and until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.