DIA has tripped a sell signal at 159.36, and although it’s just theoretical, it’s not hard to imagine this vehicle falling to the D target at 150.77 over the next week or so (see inset). Let’s try to leverage this scenario with risk tightly under control, bidding 0.65 for the Feb 26/Feb 12 150 put calendar spread four times. This means you will be buying 150-strike puts that expire on Feb 26 and shorting 150-strike puts that expire on Feb 12 for a net debit of 0.65. The maximum value of the spread — our potential profit, less 65 cents — would be roughly equal to the value of an at-the-money put expiring this Friday — in this case, the 159 put, which is currently selling for 2.94 but which could be expected to sell for around 2.60 if DIA sits around here for two more days. Bottom line: Calendar spreads bought for 0.65 could quadruple in price if DIA falls to 150 by February 12, when the options that we are shorting are due to expire. Note: If DIA is trading 159.50 or higher, lower the bid to 0.55.
