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How can we move this tent over, so that it’s in the center of our price? One thing we can do is play around with our calls. We had set our calls at 155, which was just above the market. The current market for this ETF is 146, so let’s see if we can go to the 150 calls, and see what that does to our tent.
Well, it does. It puts us a little bit closer to the center. That is probably as good as we’re going to get. In order to have a nice wide tent on this position, we want to have the difference between the calls and the puts to be at least $2.50 to $5. Let’s see what happens if we put these positions on, at the exact same strike prices.
I’m talking about selling the puts on the front month, at the same prices that we are selling the calls, on the front month. Let’s see what happens to our tent.
All of a sudden, our tent becomes to look not as wide as the top, for sure. We can take a look at the 145s, and see if we can get closer to the center of this. We’re selling all of the 145s, but we’re still a little bit off center, aren’t we? We don’t have a wide profit potential at the top of our graph.
This green line is what our profit potential is, at the expiration of the front month option. If we were going to go all the way to expiration, that’s exactly where our profit would be, depending on the price. If the price was $141, our profit potential on this position, for one contract, is $175. If it settled right at $145, which is the center of our tent – which is the highest profit potential for this position – our maximum profit is $540.
This is not as attractive to me, as our previous position. Let’s take a look, again, at our 150 calls. We want to spread these out, just a little bit. Now, we have a much wider profit potential, even though it may be a little bit lower. I think it has a little more potential to be profitable. We have a wider range of price in here.
This is the profit picture that you really want to get. The only way to get this profit picture is by playing with the option strike prices. Remember, we want to sell both the call, and the put, because we don’t know which way the market is going to go. Since we’re not predicting price, it doesn’t matter if the market goes up. It doesn’t matter if the market goes down. We want to be in the center of this profit position, at all times.
That’s how we put on a double calendar. That’s exactly what a double calendar is. It’s the sale of a front-month option – in this case, we’re doing the Mays – and it’s the purchase of the next month out, or possibly even two months out, of a call option at the exact same strike price.
To enter this order, all we have to do is right click in this green area. We go up to “Confirm and send,” and over to “Enter this position.” You can see that you have the order description, up at the top. We’re buying one contract – double diagonal. It’s actually a double calendar, but a double calendar is similar to a double diagonal.
The only difference is the double calendar uses the front month and the bank month strikes prices, are exactly the same. So, we can enter this at a $5.79 limit. It does not give us our breakeven maximum profit or maximum loss in this position, because we’re using two different months, in order to put this position on.
The cost of the trade, for 1 contract, is $579. There is $6 in commissions, for a total cost of $585. Which, by the way, is also the total maximum loss that you can have on this position.
Since we used both puts and calls, the stock cannot be – in this case, an ETF – can’t be up and down at the same time. It can only be trading at a single price. One side of this position may be more profitable than the other. Normally, if the trade does go against you, you can close it out with either a very small loss, or maybe even a small profit, without really harming your account.
If we do keep it all the way to expiration, then all we can do is take a look at the profit and loss graph, to take a look at what your actual expiration profit potential is. The important thing here is to take a look at this profit picture, and really like what you see.
On this profit picture, you have a fairly wide breakeven. 141 on the downside, and 155 on the up-side. That’s a 14-point spread between your high and low. Your current price is pretty close to the center. That’s probably as close as we’re going to get it. You’ve got a fairly wide margin of error here, if the market goes up, or if the market goes down.
Like I said, though, it’s very rare. This is where the real secret of trading for monthly income comes in. That is, that you don’t just put this position on, forget about it, let it go to expiration, without taking a look at it at least 3, 4, 5 times a week, just for 10 or 15 minutes. Review the videos on portfolio management, especially, to determine when you need to adjust these positions.
Nobody’s going to give you anything, in the market. It’s just a given. Everybody is out for themselves, and that’s the truth. They are not going to give you a profit on this position, just because you decide to enter into the position. The truth is that the real profits come from adjustments, when necessary.
Remember, there’s only two rules to the market. Rule number one is that prices will fluctuate. Rule number two, as far as options go, is that they will expire.
We take advantage of both of those absolute rules in the market. We have a wide price range that we’re trying to profit from, and we are trading the first rule, which is prices will fluctuate. The second rule is that options expire. We are taking advantage of that, because we are setting ourselves up for an expiration date in the future, by using this green line as our profit target.
That’s why these positions are really very powerful. It takes advantage of the two biggest rules of the market.
Now, if we were to enter this position, we brought up our order confirmation dialog box. All we have to do is send it, and it goes off to the market. We try to get our price, hopefully. If we don’t get our price – I show you in other videos, where we actually enter into live trades, exactly how to adjust your price in order to get filled on these positions. Take a look at those videos.