Ais the combination of a and a . When the long part of the diagonal is well in-the-money and the short end is out the position is also known as a as it mimics that position. What is important to know about diagonals?
Tom said, “Think of a Diagonal spread as atrade where you're combining a directional debit spread with a Calendar spread. Its like two trades in one with a fewer amount of contracts. Recently Volatility has popped up but when it contracts this is something to have in your back pocket.”
A graphic guideline of how to use the width of the strikes of a Diagonal spread to estimate a profit potential was displayed. This is only a guideline and because there are two differentthere is no absolute maximum profit. The maximum loss is, of course, the debit paid. Be careful with that debit. Depending upon how it is set up it may exceed the width of the strikes. An example of a negative profit expectation (despite positive ) if the stock explodes to the upside and the options trade at intrinsic value was displayed.
Tom added, “With a Calendar spread, you can get burnt on big moves (up or down). A Diagonal is a way to, but if you get a giant move, you're probably not going to make any money.”
A target for taking winners is 50% of the width of the strikes. When using Diagonals as a Poor Man’s Covered Call or Put, it’s common to pay 75% of the width. Remember the connection between. The more risk you take the larger is your .
For more information on Diagonal Spreads see:
Options Jive from March 29, 2016
Market Measures from March 29, 2016
Options Jive from April 8, 2016:
Watch this segment of Best Practices withand for a better understanding of diagonal spreads and some guidelines on their use.