Paper Trade: GE Diagonal Spread

After the run up in the market lately I'm not too excited about any trades right now. While I'm waiting I'm going to paper trade a GE Diagonal Spread. GE was trading at 16.32 at the time of entry and my chart reading tells me that is trading near the bottom of the trend lines I've drawn.

BTO 3 Jan 19 2013 LEAPS 15's @ 2.77
STO 3 Nov 19 2011 17's @ .19

I'm a proponent of diagonal spreads, however, last time I had multiple active spreads, the Lehman debacle hit and I had to unwind quickly and painfully. This time I'm dipping my toe back in the water and waiting to swing at the fat pitch.

Note: it is Thursday morning 10/27 and GE is up to 16.97. I could sell the LEAPS for 3.05 and buy back the short calls for .22. That would be a profit of .25 per contract in 2 days or nearly 10%. I would most likely pull the trigger on this trade although we should start seeing some nice time decay on the short calls after the weekend.

Note: it is Friday morning 10/28 and GE has risen to 17.29. The LEAPS can be sold for 3.20 and Nov call can be bought back for .64. Both calls have moved about the same with the rise. If I tried to exit now it would not be a profitable trade. I'm going to check each call's delta.

Note: on Friday November 8 we could have BTC the Nov 19 17's @.05 with no commissions and then sold the Dec 21 17's @.31. GE was trading at ~16.30. the LEAPS was still ~2.77. This would have lowered our outstanding investment to 2.31. This is exclusive of commissions. I'm liking this paper trade a lot and light bulbs are going off. The only issue is that enhanced income strategies using Dividend Champions and covered calls and put selling is so much less volatile and it's hard to argue with their double digit returns. This trade, however, is like enhanced income on steroids.

Note: with GE dropping below 16 on the week of November 13, this trade would be tricky...sell the Dec 16's? Managing these trades take much more attention. The LEAPS is down to 2.47, our 17's would have expired worthless but new 17's only pay .10. The December 16's pay .39, the weekly 16 pays .12. Perhaps the monthly 16 would be the way to go? That would have brought in a total of 2 writes, .58 against our LEAPS investment of 2.77. Very interesting...