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Diagonals instead of verticals


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Diagonals instead of verticals

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  #1 (permalink)
Allistah
Bay Area, CA
 
 
Posts: 136 since Jun 2010
Thanks: 5 given, 64 received

Hi everyone..

I currently do about 6-12 vertical spreads a week on weekly options. And with those vertical spreads is a lot of theta decay happening on my long options. I was thinking about trying to decrease some of that by buying the Lon option a number of months out so I wouldn't have as much lost on that side of the spread.

What do I need to watch out for when doing this? I think I remember implied volatility having an affect on different months but I don't know how much it can hurt me instead of doing vertical spreads. At the end of each week I would be getting rid of them anyways as I would only hold them for a max of 8 days.

Any tips here that anyone would want to share with me?


-Alli

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  #2 (permalink)
 theoptionguru 
Columbus, OH
 
Experience: Advanced
Platform: TOS
Trading: options
 
theoptionguru's Avatar
 
Posts: 11 since Sep 2012


Allistah View Post
Hi everyone..

I currently do about 6-12 vertical spreads a week on weekly options. And with those vertical spreads is a lot of theta decay happening on my long options. I was thinking about trying to decrease some of that by buying the Lon option a number of months out so I wouldn't have as much lost on that side of the spread.

What do I need to watch out for when doing this? I think I remember implied volatility having an affect on different months but I don't know how much it can hurt me instead of doing vertical spreads. At the end of each week I would be getting rid of them anyways as I would only hold them for a max of 8 days.

Any tips here that anyone would want to share with me?


-Alli

Sent from my iPhone

Alli,

Although your post is a bit old, it's an interesting question. I'm sure, since you are a TOS user, that you are familiar with the Analyze tab and Risk Profiles. Using them it's easy to see the difference (I am a very visual person). Compare the two examples below of a ATM Credit Spread (Vertical) and an ATM Long Vertical.

For me, looking at these profiles, it's a matter of what your analysis and expectations are for price over the 8 days you are holding. Where the Credit Spread is directional, the Diagonal is more neutral (in this example) - not unlike a Calendar Spread.

As with Calendars, Diagonals are dependent on IV. If there is a increase in IV, your long back month strike will tend to retain it's value. If there's a decrease, your back month will decay quicker. A solution is changing your back month to something further out, but then you will pay more for the trade. Compare that to Verticals, where your max profit is fixed and not dependent on IV, since it's assuming all strikes expire OTM for zero value.

Generally, if I want to do a Calendar, I look for lower IV in the back month than the front month - not easy to find. Of course, if the front month has an earnings date in it, then you can count on the front month having a very high IV. In that case a Calendar is usually not a good idea if you are going to hold through the earnings announcement.

I, like you, almost exclusively trade Credit Spreads on Weeklys and near month expirations in one of my accounts - although not as many as you do. Some are ATM and others OTM with about a 20-30 delta on my short strike.

I hope this helps.



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  #3 (permalink)
ESFXtrader
West Coast of Florida
 
 
Posts: 505 since Jul 2010
Thanks: 56 given, 2,284 received


Alli,
I have perfected a method similar to what you are asking about.
I buy ITM options a month out and sell ATM or just OTM options of current month and the short option pays for about 50% of the cost of the long option. This diagonal trading method has been a consistent winner for me. You need at least 9.1 download to place the diagonal trade on TS if you use the weekly options as either the long or short part of the trade. Older versions would not allow the trade to be placed. The gains often varied from 7% to over 40% per trade and the few losses were small.
Check out:

You will see examples of the diagonal spreads that I have traded.
Hope this helps.
Good trading.
WK

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  #4 (permalink)
ESFXtrader
West Coast of Florida
 
 
Posts: 505 since Jul 2010
Thanks: 56 given, 2,284 received

Diagonal Spread Trading
For those interested in diagonal spread trading of options, here are two trades opened and closed this past week. When placed properly, there is little risk and neither ever went in the red.
CAG spread was purchased when price was at $27.95: bought $27 Jan calls and sold $28 Dec calls for only .79 and sold for 25% gain in two days.
CMCSA spread was purchased when price was at $36.36: bought $36 Jan calls and sold $37 Dec calls for only .79 and sold for 12% gain in three days.
One can easily make several hundred dollars per month on similar trades month after month.
Good trading.
WK

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  #5 (permalink)
Lepanto
Monrovia, California USA
 
 
Posts: 8 since Jul 2012
Thanks: 26 given, 4 received

Hi WK!

I've been following your thread on diagonal spread trading and am curious to know how you select stocks to trade.
Do you have a watchlist of slow movers or do you prefer more volatile stocks?
Truly appreciate your inputs.

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  #6 (permalink)
ESFXtrader
West Coast of Florida
 
 
Posts: 505 since Jul 2010
Thanks: 56 given, 2,284 received

I have a list of stocks that I add to as I find another worth watching. I also remove some as the option trading drys up. I have found that many of the indexes and the better trade-able ETFs are harder to fine a good diagonal option trade. I determine which direction I expect the price to move and if there is a trade worth taking, I place an order under the split market price and often get filled. If I only traded options, I could watch for these opportunities all day, but my favorite trading is futures. Options have become more of a hobby and you can sleep at night knowing the risk is negligible. It has been a long time since I've had a loser. Of course, any trade can be one, but the odds are in my favor. Below are two more examples of these Diagonal Spread Trades. I have closed the YHOO trade for 13.5% gain as seen in the label row above the trade. The EEM trade is still open.
Good trading.
WK
PS As you can see, the screen shot of my trades shows how I keep up with my trades and when I need to close them. Hope this helps those interested in trying what I believe to be the safest way to trade options and was devised by me. This was my first trading plan of three that I devised. I showed the other 2 here. Only this forum has seen them in their entirety.

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  #7 (permalink)
ESFXtrader
West Coast of Florida
 
 
Posts: 505 since Jul 2010
Thanks: 56 given, 2,284 received

For those interested, the Diagonal spread trading continues to work well. For several months, not any of my spread trades have gone into the red. I closed the EEM trade with only a modest net gain of 2%. Below is the last spread on SPY. In less than 4 days, I closed the spread on 12/12/12 for a gain of 15.7%.
Good trading.
WK

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  #8 (permalink)
ESFXtrader
West Coast of Florida
 
 
Posts: 505 since Jul 2010
Thanks: 56 given, 2,284 received

Hello fellow option traders.
Are you a winner when it comes to trading options?
Do you still wonder if my Diagonal Spread trading strategy will work for you?
Are you yet to paper trade it?
Have you at least copied option strike prices and noted their price action to see how they reacted to the price action of the underlying asset?
Are you a conservative option trader?
Do you like low risk trades with a high percent win rate?
Maybe you should look into my spread trading.
Check out the last trade on CELG. I bought the spread when CELG was at $80.06 and my cost was $2.33 per share plus commissions of $1 per contract. Buy 1, sell 1 to open and sell 1, buy 1 to close =4 per trade per contract.
Long call Feb $80 call option at $3.61
Short call Jan $82.50 call option at $1.28
Difference of $2.33 + commissions (round turn) .04=$2.37 X 100 shares = $237 per contract cost.
The risk is far less than $100 on the trade unless the underlying asset went against your trade in a very big way.
After the sell on 1/3/13, the net gain was 18%. It only went 2-3% against me when the price of CELG dropped to its low of $77.22. Sold at 280-237-cost= 43/237=18.1%. With the price moving as high as 82.39 on 1/3 and 83.17 today-1/4, the spread also move up to as high as 2.90 yesterday and 2.95 today. Hopefully you can see the potential of consistent profits in these short term trades.
AS always, Good Trading.
WK
PS I have not had a losing trade in many months.

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  #9 (permalink)
 datahogg 
Knoxville Tennessee USA
 
Experience: Intermediate
Platform: TOS
Trading: ES, NQ, CL, /6E futures options.
 
Posts: 327 since Oct 2012
Thanks: 134 given, 134 received


ESFXtrader View Post
Hello fellow option traders.
Are you a winner when it comes to trading options?
Do you still wonder if my Diagonal Spread trading strategy will work for you?
Are you yet to paper trade it?
Have you at least copied option strike prices and noted their price action to see how they reacted to the price action of the underlying asset?
Are you a conservative option trader?
Do you like low risk trades with a high percent win rate?
Maybe you should look into my spread trading.
Check out the last trade on CELG. I bought the spread when CELG was at $80.06 and my cost was $2.33 per share plus commissions of $1 per contract. Buy 1, sell 1 to open and sell 1, buy 1 to close =4 per trade per contract.
Long call Feb $80 call option at $3.61
Short call Jan $82.50 call option at $1.28
Difference of $2.33 + commissions (round turn) .04=$2.37 X 100 shares = $237 per contract cost.
The risk is far less than $100 on the trade unless the underlying asset went against your trade in a very big way.
After the sell on 1/3/13, the net gain was 18%. It only went 2-3% against me when the price of CELG dropped to its low of $77.22. Sold at 280-237-cost= 43/237=18.1%. With the price moving as high as 82.39 on 1/3 and 83.17 today-1/4, the spread also move up to as high as 2.90 yesterday and 2.95 today. Hopefully you can see the potential of consistent profits in these short term trades.
AS always, Good Trading.
WK
PS I have not had a losing trade in many months.

I can see a large advantage in diagonals. VEGA is positive. During a crash (sell off) the positive VEGA would
help make the position possibly profitable. How did you do in the crash of August, 2015?
Have you considered double diagonals?

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