Options Jive

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Mechanics of Diagonal Spreads

Options Jive

On today’s segment of Options Jive, Tom and Tony discuss how and when we should trade diagonals. Diagonal Spreads are a combination of a Vertical Spread and a Calendar Spread and can sometimes be used to replicate covered calls or covered puts.

Max Profit: With two expirations, there isn’t a set max profit for a diagonal spread. However, the width of the strikes can serve as a guideline. Be mindful of the debit paid for a diagonal spread. It can exceed the width of the strikes depending on how it is set up! A debit of 50% of the width of the strikes is a good target, but could go up to around 75%.

While the strategy has positive deltas, there is a negative expectation if the stock goes to the upside and options trade at intrinsic value.

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