MDLZ DiagBFly – analysis of a campaign

Original Trade initiated on June 17, 2020:

$MDLZ @ $52.74
BTO 20 MDLZ Jan 22: 40 Put / 65 call long strangle @ $4.65 (total cost of trade = $9,300).
583 days left to sell more premium.

Analysis:

Closed out position on January 8, 2020, MDLZ trading at $58.19.

Days in Trade: 205 – 29 weekly option periods.

Buy transactions: 34 – Bought premium total: $59,618

Sell transactions: 34 – Sold premium total: $67,873

Note: more trades than weekly option periods reflect making ‘scalp’ trades within the week.

Net premium collected: $8,255 on the 20 contract original trade.

% return for 205 days = $8,255 / $9,300 = 89%. (my thinking on demonstrating returns, others may suggest alternatives).

Points for reflection: Early on it was clear that the premiums were not large enough to generate enough $returns – I mentioned after a few months I was going to stop this strategy and move into higher priced underlyings – IBB in this particular case. Despite this, I carried on mainly to practice discipline on rigorously rolling and adjusting week after week. I’m glad I did, because it becomes a habit, and one does not really care about how the underlying moves – you just intuitively know where to roll to, even at the expense of rolling out in time.

EWZ was my starter using this Diagonal Butterfly approach (I took it from the seminal work on options by Larry McMillan).

The percentage returns on capital deployed are good because the LEAP strangle was an OTM structure. My current preference is for an ITM LEAP strangle strategy – mainly because I think it would handle a strong down move better – however it is obviously ties up a lot more capital. The jury is still out on this.

The whole idea of the strategy was to deploy capital with inbuilt protection, hoping to generate decent returns but able to handle a defined amount of volatility. To that extent it worked. The strategy continues in other underlyings: EWZ, FAS, IBB, XLK, XLY. Higher priced stocks that generate more premium which I feel gives more flexibility on the rolling strategy (the key part of managing the campaign).

#DiagonalButterfly