put diagonal spreads

traderlux · Jun 5, 2012

put diagonal spreads,
on one of the free option letters, option zone insiders, a trader has recently written about selling wkly puts (near the money) and covering with long puts several strikes below (otm) and several months out, and then continue to roll out the short for several weeks....

anyone trade these or have an opinion?

RPEX · Jun 6, 2012

Quote from traderlux:

put diagonal spreads,
on one of the free option letters, option zone insiders, a trader has recently written about selling wkly puts (near the money) and covering with long puts several strikes below (otm) and several months out, and then continue to roll out the short for several weeks....

anyone trade these or have an opinion?

It's certainly a position, whether or not it's right for you depends on what kind of risks you want to take on. Take a look at the greeks and see if they match what you think will happen to the stock/vol. Maybe the person writing the letter is advocating this for a particular stock and explains their scenario, because it doesn't sound like something i'd want to do on every stock, all the time, forever.

Depending on which strikes and expiries you choose you will be
Long delta
short gamma
Long vega
Long theta

while the strikes are atm/otm

Whistlingleaf · Jun 6, 2012

Depends on your thought of direction IMO ~

Are you experienced enough to know what to do if the underlying goes straight up for 30-120 days ?

Be sure to realize that put prices are currently elevated and if the market turns up IV will come down and put you in a bad place on your longer dated option.

Diagonals work good on paper and generating a weekly income sounds GREAT ...on paper... but not so well in reality at least for me - I stick to plain put/calls or straight put or call spreads now.

Diagonals/calendars are not for the inexperienced trader IMO

traderlux · Jun 6, 2012

Quote from RPEX:

It's certainly a position, whether or not it's right for you depends on what kind of risks you want to take on. Take a look at the greeks and see if they match what you think will happen to the stock/vol. Maybe the person writing the letter is advocating this for a particular stock and explains their scenario, because it doesn't sound like something i'd want to do on every stock, all the time, forever.

Depending on which strikes and expiries you choose you will be
Long delta
short gamma
Long vega
Long theta

while the strikes are atm/otm

rpex,
they suggest to use a stock that has a short term catalyst to cause price to rise

traderlux · Jun 6, 2012

Quote from Whistlingleaf:

Depends on your thought of direction IMO ~

Are you experienced enough to know what to do if the underlying goes straight up for 30-120 days ?

Be sure to realize that put prices are currently elevated and if the market turns up IV will come down and put you in a bad place on your longer dated option.

Diagonals work good on paper and generating a weekly income sounds GREAT ...on paper... but not so well in reality at least for me - I stick to plain put/calls or straight put or call spreads now.

Diagonals/calendars are not for the inexperienced trader IMO

wl,
i am inclined to agree that plain puts/calls or vertical spreads is the best for me also. i have been following a letter that uses calendars/diagonals and things go along decent but sometimes with tons of adjustments and then a big loss.

Don Bright · Jun 6, 2012

(sorry)

Oh good Lord... reminds of Maverick's posts from a couple of years ago.... looking for someone to come up with a theta generating, back spread, that gets you longer on the upside and shorter on the downside, caused all sorts of pondering... and for what? To see that of course there is no such position.

Options are simple, and each series is fairly priced based on Vol and Interest/days to expiration.... what do you expect with all the fancy "what if's?"

If you want to make money, you sell options. If you want to "take a shot" you buy and hope.

IMO, the old "condors, butterflies, strangles, straddles, bull and bear spreads, boxes, calendars, etc." are just that ...."old" No free money.

Come on Atticus, back me up on this..... Maverick?

Don (hope I'm not upsetting anyone)

atticus · Jun 6, 2012

IMO, they're preferable to a vertical backspread, as they don't suffer from delta-decay and the initial gamma is more reasonable (if the strike width = the vert backspread). IMO, a better position, but really only useful when you *need* to be in a calendar; ramp into earnings, FDA, etc.

Better to be strangled in those. They're popular as earnings trades when the tenors are really skewed. Example, short the 45/50 strangle at 70-vol and long the back 40/55 strangle at 40-vol.

RPEX · Jun 7, 2012

Quote from traderlux:

rpex,
they suggest to use a stock that has a short term catalyst to cause price to rise

So basically something which is a "sure thing", in which case if you want to be long delta long vega there's nothing wrong with punting the outright call, or ratio call spread. Like atticus said the latter suffer from delta decay, but in the example you've given me the holding time is not that long because there's some event. By the sounds of it the advisory guy just like to generate more legs / make things sound more complicated.