Advanced question about Diagonal spreads

[RGLD]

The big question is: What is your desired exposure?

My guess is you want still to be Short Theta and Long Delta because that was the initial exposure. If so, a better expression of that is a short put spread in the same expiration.

Match the Mar18 255P with higher strike Put that will give the net Delta exposure that you are comfortable. Delta will more likely be the primary source of your gains (you have to make the right directional bet as with most things) and Theta is having the wind to your back. Like a dividend stock, but the similarity stops there. You're upside is capped. And so, is that (GAMMA) upward impulse when the stock moves in your direction.

I love Gamma so I go long an option which is short THETA. The more theta I pay, the higher Gamma I get. There is an expression that "gamma kills". Well as your my competitor in the market, I want to kill you....with GAMMA. It's mostly about expectations on volatility.

I think you found your way to this trade via the modeler. If so, brush up on your knowledge of the Vol Skew and Vol Curve.

I rolled it today. Just for the sake of science, I'm going to post to until this thing expires or I decide to close out the position completely.

I rolled the 262.50 Short Put to next week at $245 (below my LONG because I thought today was going to be another bad day). Instead it rallied and I had to roll it up again to 255 (next week expiry) for $12.80. Snow closed today at 253.5 so you can imagine how much GAMMA is in this short PUT. No matter how much the Theta decays it will not be more than the gamma if the stock goes my direction. If it goes down again next week, I'll just keep adjusting the strike price while never touching the 255 LONG PUT.

I'm not sure if this is any better than just resetting and buying a same date expiration put spread but we'll see.

 

[xandman]

I want the underlying to go up yes. Having a put spread on the same expiration would not give me the benefit of having only a $171 loss when the trade went -$10 against me. It would be much higher. I guess that is what you mean when Theta is on my back? They don't work together, if I'm gaining on Delta ( like I want) I'm losing value on the theta. Theta is only like a dividend when you're short.

I've been trading like this because I like the extra benefit of having reduced losses if the trade goes against me and if it goes my direction, I would roll it up higher. The other issue is if the underlying goes up too much, it'll eat your profits from the LONG unless you roll up the front month to a higher strike price asap.

Actually, I meant a Short Put Spread where you buy the lower, sell the higher strike. That "earns" theta.

Sorry for the loss. I hope my comments don't detract you from the essence of "the bet" that you are trying to put on. I am just opening up ways of thinking about the trade.

So, your constantly short the front month. Is it due to the idea that "you want option income constantly rolling in"? That idea is perpetrated by a lot of option education sites and is very dangerous.

What you desire, lower loss convexity and theta gains are not compatible. Granted, you found a structure that provides both. As a rule, you are paid to bear risk and you may pay to hedge risk. The markets are very efficiently priced and getting it both ways comes at a dear cost.

Like I said, I didn't have a good handle on the trade. I'll shut up for awhile to encourage others to chime in. Your structure remains: "interesting".

 

[RGLD]

Actually, I meant a Short Put Spread where you buy the lower, sell the higher strike. That "earns" theta.

Sorry for the loss. I hope my comments don't detract you from the essence of "the bet" that you are trying to put on. I am just opening up ways of thinking about the trade.

So, your constantly short the front month. Is it due to the idea that "you want option income constantly rolling in"? That idea is perpetrated by a lot of option education sites and is very dangerous.

What you desire, lower loss convexity and theta gains are not compatible. Granted, you found a structure that provides both. As a rule, you are paid to bear risk and you may pay to hedge risk. The markets are very efficiently priced and getting it both ways comes at a dear cost.

Like I said, I didn't have a good handle on the trade. I'll shut up for awhile to encourage others to chime in. Your structure remains: "interesting".

I didn't lose any money on this "yet" because I'm just going to keep rolling the front options until both options are on the same expiration date.

If you see above, I posted what I did today. So we'll see. I don't have any modelling software, I'm just doing this strictly off what I do know thus far and I don't mess with greeks/vol that much. I just know the front option will always gain more than the later month if it expires near the money.

My maturity for the LONG is in March, so I have 6 more weeks of rolling before it expires. I don't see how it's dangerous though, this has the same risk profile as a put spread, (maybe a little safer.)

How do you see diagonal spreads being used? Do traders just get out of both options together when the front month expires? That can't be, there is too much flexibility to call this method experimental.

 

[qlai]

Have you considered taking assignment? You would have long stock at $262.5 and long put at $255. I guess you could sell calls against the stock if you "must fight" theta.

 

[xandman]

I didn't lose any money on this "yet" because I'm just going to keep rolling the front options until both options are on the same expiration date.

If you see above, I posted what I did today. So we'll see. I don't have any modelling software, I'm just doing this strictly off what I do know thus far and I don't mess with greeks/vol that much. I just know the front option will always gain more than the later month if it expires near the money.

My maturity for the LONG is in March, so I have 6 more weeks of rolling before it expires. I don't see how it's dangerous though, this has the same risk profile as a put spread, (maybe a little safer.)

How do you see diagonal spreads being used? Do traders just get out of both options together when the front month expires? That can't be, there is too much flexibility to call this method experimental.

In/out and with adjustments are probably both common.

 

[xandman]

Have you considered taking assignment? You would have long stock at $262.5 and long put at $255. I guess you could sell calls against the stock if you "must fight" theta.

long stock + long put = Synthetic long call

He wouldn't even break even from selling the call because the put he bought would be at a higher IV than the call he sold. Just a ton of lost edge.

I'm out. I just couldn't resist that one. The guys try to keep everyone reminded. It is verging on altruism. We really should be taking your money.

 

[RGLD]

Have you considered taking assignment? You would have long stock at $262.5 and long put at $255. I guess you could sell calls against the stock if you "must fight" theta.

Yes you can get assigned, but the risk profile is the same.

Say I get assigned the put.

I own 100 shares of XYZ.

1) I get to collect all the theta value
2) If the stock goes up, I win, if the tanks, my long put is still there.


As for the Theta decay.. I don't think neither of you know the short put is going to decay faster than my long as long as the underlying is between the 2 strike prices. I don't need to sell a call to gain theta.

 

[MrMuppet]

There is no doubt if I "should" be doing this trade. I definitely should as I posted my small loss after a $10 drop. I just don't know if one is better than the other. That's why it's more on the advanced side.

Also it's impossible to know how much a diagonal spread will be worth when one leg expires. There are models that can predict, but it's not as clear cut as a same expiration spread. That's why those options examples you always see always talks about what the value is worth at expiration. Very rarely do they ask you, if one options expires OTM how much is the remaining option worth that is 2 months out and $X.xx away from strike price?

What about not holding till expiration?

 

[qlai]

If the stock goes up, I win, if the tanks, my long put is still there.

If you hold shares and the stock tanks, you will not be able to sell short puts. So getting assigned changes the trade to be a directional bet(because you are holding a synthetic call and hoping for stock to rally). It seems seasoned options traders here are very much against directional trading.

 

[RGLD]

If you hold shares and the stock tanks, you will not be able to sell short puts. So getting assigned changes the trade to be a directional bet(because you are holding a synthetic call and hoping for stock to rally). It seems seasoned options traders here are very much against directional trading.

I don't know about the options community here. I use options to do directional and if it goes down I should be losing money because that is the opposite direction of what is intended. If it goes down like you said and I get assigned, I would probably just exit and take the loss. If I get assigned but the stock does not tank, I'll just sell another put. Remember if you get assigned you collect all the premium from the short put so that helps a little bit. But people are not stupid they will never assign unless there is a dividend coming up. I check for those.

What about not holding till expiration?

No, you can't tell. You can make some good assumptions at what the spread would be worth using modelers, but those are predictions.