Re: [TheOptionClub.com] Re: Best Adjustment Method

 

On Wed, 24 Mar 2010 21:50:47 -0500, "mcatolico"
<mcatolico@mindspring.com> wrote:

>Scenario 3: over a week or so the underlying seems to drift back and forth
>but maintains something of a net positive bias in line with the overall
>market. The stock eventually breaches the 190 strike. Here things get a bit
>more uncertain. Overall the implied assumptions of the initial position are
>not necessarily disproven as volatility has probably declined and the price
>movement may be possibly mild to potentially range bound. Here id want to
>add some kind of theta positive trade and possibly look for a way to even
>get short some deltas to try to capture a small scalp if the rally retreats
>a bit. The trade id look to do might be an additional short call vertical -1
>190/+195 and a bit of a bearish gambit with the +185p/-180p all for a small
>net credit.

While I think I understand the trade from the point of view of the
expiration graph, I don't understand the reference to use it for
scalping.

My understanding is that the descending staircase -180p +185p -190c
+195c is added to the original, 175c - 180c -190c +195c condor. Since
the underlying is past 190, this can certainly be done for a credit.
So it adds $500 + the aforementioned credit to the profit graph below
180, the credit plus something between $500 and $0 to the max profit
zone between 180 to 185, adds the credit to the graph between 185 and
190, and subtracts something between the credit and (500 - credit)
between 190 and 195 and subtracts ($500 - credit) above 195 where the
trade is in the loss zone at expiration. So to me this, is a bearish
play for somebody who is predicting the underlying is heading below
190. Certainly, it is not the kind of adjustment, like in scenario 1,
that can be taught to newbies. I hope to be educated as to why a
sophisticated trader would entertain putting in on. :-)

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