New DIA Option Position

The DIAMONDS Trust Series 1 (DIA) is an ETF that seeks to match the results of the Dow Jones Industrial Average (DJIA).  After exiting my SPY (S&P 500 ETF) options this moring for an overall profit, I switched my attention to DIA. 

While DIA was trading at $82.32 I bought to open two DIA December 84 puts (DAVXF) for $9.10 each and paid $1831.49 with commisssions.  I played around with my entry point for the other leg of my trade, selling lower strike puts.  While DIA was trading at $82.68 I sold to open two DIA October 75 puts at 2.20 and received $428.50 after commissions. 

Selling this second leg seems to be the same thing I just said I regretted doing on SPY, so I’ll explain my logic.  I don’t think the markets are going to stay at this level until December when my Dec 84 puts expire.  I’m expecting a flattening, if not a rise at some point in the next couple of months (if not later today).  I bought the December 84 puts in case I’m wrong and the DJIA falls more.  I sold the October 75 puts because they are more than $7.50 out of the money and expire in five and a half trading days.  These puts cut the cost of my hedge and if DIA falls below $75 next week I’ll close both legs of this trade for a net profit sinc e the gain on the December puts will outweigh the loss on the October puts.

I don’t want the option assignment, just the cash.  I have the potential for DIA to close next Friday above $75 allowing me to keep this premium for a full profit while either selling my long puts for a profit too or selling new puts for the November strike without the downside risk which the December puts would still be a hedge against.

If DIA goes up instead of down, I’ll have enough gain on my other positions where this would be a loss without much pain.  I don’t see a rally coming that lasts too long, so my October puts will be full profit and I’ll sell new November puts and then December puts, depending how much and how fast DIA climbs and try to reduce my loss more, if not create a profit still.