Diagonal Put Strategy

cafeole

cafeole

I was introduced to this strategy by a "Make 3K-5K a month" Preston James ads. I don't ever believe this type of hype, but I bought the book and DVDs for $7 just to see what it was about. He does not call it a diagonal and he talks like he made this up himself and calls it "The Money Press Method". He is really trying to get you to sign up for his $97/month service.

His book and DVDs are all hype and no real substance, so I thought I would ask the Options Gurus here about the real risks of this trade.

He sells weekly puts against a longer term long put at a lower strike 3-6 months out.

I am very familiar with verticals and have done a few of them in the past. However, I don't know what happens to a diagonal if the short term put gets assigned. Does the longer term put protect you automatically?
 
cafeole said:
However, I don't know what happens to a diagonal if the short term put gets assigned. Does the longer term put protect you automatically?
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Yes, it continues acting as a hedge and protects you to an extent. Meaning you may lose some, but nothing will change from holding the previous put short vs being assigned. You could then close both positions or just sell the shares and sell another put.
 
guru said:
Yes, it continues acting as a hedge and protects you to an extent. Meaning you may lose some, but nothing will change from holding the previous put short vs being assigned. You could then close both positions or just sell the shares and sell another put.
More...

He touts that you can this with a small account and using large priced underlying so I assume you can't get assigned if you don't have the money in the account to cover the stock buy. In this case, I assume the broker will close both positions.
 
cafeole said:
He touts that you can this with a small account and using large priced underlying so I assume you can't get assigned if you don't have the money in the account to cover the stock buy. In this case, I assume the broker will close both positions.
More...


You can always get assigned and this happens to everyone. You don't need more money at that time either, since you'd be hedged by your other put as you've asked initially and as answered above. So nothing will change whether you're short put or own the shares.
Even when your balance gets out of whack, brokers deal with this every day, giving you time to buy/sell whatever you want to get your account back in order. Though owning 100 shares being protected by a put is a perfectly reasonable position.
Some basic brokers, like Robinhood, may close your position 15 minutes before an option expires if it's at risk of being assigned. But if assignment happens to happen before expiration day and you don't have sufficient margin then you'd be given some time to close whatever positions you'd like. Generally everyone deals with this and there aren't more basic trades than 1-2 option combos (spreads, calendars, diagonals), so if assignments would be problematic then no one would be able to trade anything. You may even profit from being assigned if the stock goes up overnight.

Other than that, I taught my wife how to trade calendars and diagonals on small account at Robinhood, specifically because they don't require much cash or margin. And they can work well, especially once you get the hang of it, though of course having losing trades and losing streaks as well.
 
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cafeole said:
He sells weekly puts against a longer term long put at a lower strike 3-6 months out.
More...
Is long-term put held until it reaches certain DTE? I assume he is doing that to reduce time decay. But if you buy long-term put and the price moves up significantly, I assume he would roll it up?
 
qlai said:
Is long-term put held until it reaches certain DTE? I assume he is doing that to reduce time decay. But if you buy long-term put and the price moves up significantly, I assume he would roll it up?
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His sales pitch does not include the details. He does have a 24 day trial period I might try after I get back from vacation.
 
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