Sold Vertical Call Spread on DIA

A few weeks ago I saw an opportunity to sell a deep in the money put spread on MON for very little out of pocket.  I didn’t pull the trigger (and still don’t know why) and saw MON gain $15 over the next few weeks.  I would’ve made around $850-900.  I noticed DJIA was having trouble at its recent intraday highs and started thinking it was due for a small pull back.  I started watching the DJIA ETF, DIA.  The Dow and DIA actually made it above the intraday highs from the past two weeks, but then faltered immediately after.  That’s when I decided I should place an order.  It took me a while to figure out what options I wanted to use, but decided to stay in the money to increase my potential profit and decrease my potential loss.  While the probability is lower with this trade, the dollar risk is lower.

While DIA was trading at $104.90 my limit order hit and I sold four DIA December 102 calls (DIALX) for $3.50 each and received $1,397.20 after commissions.  At the same time, the other leg of my strangle hit and I bought four DIA December 103 calls for $2.72 each and paid $1090.80 with commissions.  That gave me a net credit of $306.40 which is the most I can make on this position.  The most I can lose is $93.60 (400 shares x the $1.00 between 102 and 103 – the net credit I received) plus commissions of less than $11.00 for opening and closing both sides of the trade.  I don’t plan to let this position make it until expiration.  $102.25 is my target for DIA based on the chart which I see trading between $102 and $105 since November 10th.  If/when DIA makes it below $103 I’ll have to start considering closing the position for a profit since the 20 day moving average could offer support earlier than I’m planning for.  I might even put in a limit order tomorrow or the next day to close it earlier if I can make $150-200 quickly.  This is a different type of position than I usually manage, so I’m being fairly tentative.

Aside from the ~$93 I have at risk, the bigger risk is that I’m putting myself in a position to lose if the Dow climbs higher with only two other positions that could gain at the same time.  Since I’m mostly in cash right now I’d already benefit by the markets declining some in the near term in that I have a lot of my fire power on the sidelines still and could get in cheaper on a dip.  I didn’t really need to add to that advantage, but felt this was a good position to take anyway.  Depending on how the next couple of days go, I might even consider selling out of the money puts on SPY or SSO to give me more exposure to the upside.  The two positions wouldn’t actually be counter to each other since I’m looking for only a dip in the Dow and possibly more of a longer term uptick in the Dow and S&P 500.  Maybe I’ve played it right, the Dow will sink after today’s inability to sustain a new higher high and I can get out with a profit and turn more bullish in a few days or a couple of weeks.