Eric,
I find a much larger comfort zone in trading Diagonals than credit spreads. Diagonals offer greater diversification with respect to adjustments going forward, ie, risk management.
Let me also state, that we will be trading 'haircut margin' next month, and find the use of capital/risk vs. reward/risk a much nicer environment to profit from... using diagonals rather than credit spreads.
That said.... with 'haircut margin' the entire realm of strategies now becomes much more GREEK or portfolio oriented.
For example... as diagonals approach expiration and their corresponding short strikes... you have maximum profit potential, but also introduce RISK!. Using haircut margin and say applying an OTM backspread, can rduece the risk tremendously.... and for a credit, at that moment in time.
That does not imply the risk in your portfolio is eliminated... but it does shift the risk area away from the current expiring diagonal.
In a retail account... if I were to trade diagonals very conservatively... I would place 3 month out longs vs. 2 month out short diagonal positions... and reposition after 30 days. The return THETA ( and possibly VEGA) has been around 4% a month... with very little risk, huge profit windows. The largest cost in this type of position results from trading expenses... and using a direct floor broker can help increase the returns another 2+%.
I believe this is similar to what Mark does... using CTM options.... for credit.
Hope this helps.... it's learning in 'motion'.... and been very profitable so far.
M~
Quote from Eric99:
Murray,
You're being humble. I've learned a lot from your posts.
For context, I trade for time decay income without predicting market direction. I am playing with some CTM strategies as well (thanks to insights I've learned from cache, rally and others). But my focus is always on minimizing risk while collecting small amounts of premium over time. Always defined risk. I look at all positions together as a portfolio and take losses and make adjustments accordingly. I don't specifically trade volatility but will modify my approach according to where I think volatility may be.
You and dagnyt (Mark?) seem to trade diags more than others, so I'd value your opinion on this. Would you trade a diag over a credit spread with an extra wing, ie., a backspread. Is 'going diagonal' primarily a gamma-reducing strategy vis-a-vis a credit spread? Thanks for your thoughts!
