Since your long leg is further in time than the short leg, isn't the max profit much more than the spread width? This is because when the short leg gets close to expiry, the long leg still has extrinsic value. I often set my long leg to 3 months away and the short leg about a week and try to collect premium weekly in case of weekly options and keep on rolling the short leg to collect premium. This also allows me to adjust my short leg and keep it out of money.
I have been playing with diagonal spreads on bitcoin and ethereum this year (I guess I need more risk than a sane person can handle). And I think you can improve on the concept by buying f.i. a three month ITM call and keep writing ATM weekly options on that call. Even is the price stays flat, you'll win back the purchasing price of the long call and then some. However, when price moves in your direction rapidly, the short call loses more value than you gain with the long call. This because the delta and gamma of the long call are lower than the delta and gamma of the short call. Fortunately you can sell less ATM calls to prevent the loss from such a scenario. Actually, the only scenario where this strategy loses is when prices move against you rapidly. Which does happen, but not very often. Maybe it's even possible to hedge against such a scenario by also opening a contrarian diagonal spread.
I think your explanation of the profit potential is erroneous. You said that the width of the spread minus the debit you paid is your profit potential, which is true for a vertical spread. In the case of a diagonal, I don't think the profit potential can really be predicted since the long will outlast the short, and there's no way of knowing what the long will be worth when the short expires. This strategy may be a diagonal, but I look at it as more of a poor man's covered call in a way. Please correct me if I am mistaken. Thank you!
Incredibly awesome presentation. Well explained, concise, with clear examples and great energy. Comment from a Highly Qualified Educator & Investor. Keep at it.
This is a great video. I finally understand diagonal AMD calendar spread better and I will put them into good use. I am looking toward to the next video
Hi Jim If I entered Long Call Diagonal Bullish Spread than my trade will be entered for a debit. In such case do I required margin for particular trade? If yes, can you please let e know the calculation for margin requirements? For Example: MSFT Stock at $252.46 (CMP) Purchase ITM 245 call for $13.52 (16-Jul) Sell OTM 262.5 call for $1.76 (18-Jun) Net debit = $11.76 on a 17.5 point-wide long call diagonal spread
Not sure why the diagonal is compared to a vertical here because in a certain area it can make more than the width of the spread It's like the calendar part of the trade was completely ignored This is only true when the trade is OTM in the profit zone that is the max you can make but when you are closer to ATM you can make more than the width of the strikes Of course that brings in more risk because you have to stay in it almost to expiration but that is also the good part of the diagonal With a vertical when you are near ATM you are at a loss and you have to wait for the trade to expire to realize any gain With a diagonal at the same point you most likely have a gain and you could close the trade or you could roll the short out if there is more time
I didn't know about paying 75% of the width. Thank you! (Don't you think brokerage firms should reduce the fee for contracts on stocks under $30 bucks? You have to buy more contracts, so they should charge less!)
Couple of thoughts: 1. Taking the credit likely increases risk and capital requirements -- such as financing the diagonal with uncovered OTM options 2. It's sort of contradictory - the long calendar/diagonal can capture vega (benefits from expanding IV), yet if you believe IV will expand, why would you be selling premium before its price increased? Your own analysis may provide compelling answers to these points, so these are simply thoughts to consider
Good video. Talking about debit being 75% of width, should we adjust the cost for intrinsic value of the ITM option premium? That is, Debit minus intrinsic value
Can you explain what the adjustable interest is when you’re looking at price slices and analyzing the trade in Think or Swim? I’m pretty sure VOL adjust is if you’re looking to see how volatility rising would effect your calendar/diagonal. Thanks man
Sounds like a feature to observe interest rates affecting theoretical option price. You might compare that setting on long-dated options against options expiring in the current year. If possible, include the greek "rho" in your analysis to more clearly see the relationships between interest rate, rho, and option price
Hello Dr. Jim - I have been watching tons of videos - regarding rolling out in time - what if the next decent Expiration is not until June (March 19 current position). Do the mechanics change? Everything else with the mechanics works but boy...such a long way out! (The trade is a strangle not a diagonal spread but this is your most recent video)
Nice video but I have a question For bullish , why can we make it as both the short and long call at OTM while the short one is closer to the market price ? E.g apple at 130 Jan short call at 135 Feb long call at 140 Wouldn’t that reduce the paid premium which in turn increase the return ratio ?
You for got one station, it also a poor mans covered call. Sold puts against it and 42 strike foe 2 months .. the I wish I still had it with the 30 days that should be on it. WOULD HAVW COULD HAVE, SHOULD HAVE.
What isn't especially clear in this video is: OK, it's a debit spread, the long leg is in the money and of longer duration. The short leg is OTM and shorter term. If the play goes the wrong way relative to your expectations, **the loss on the ITM option will far outrun the gain on the short leg** and you will work your ass off to overcome that, if you even can. Yeah, you can "roll" the option, this means "you have the freedom to roll the short option" BUT IT IS AT A LOSS ANY TIME YOU DO SO!
Watching this video a year after upload is bizarre, as AAPL is trading at exactly $129.56, and February and March would be the appropriate months for this trade at the current time.
Since your long leg is further in time than the short leg, isn't the max profit much more than the spread width? This is because when the short leg gets close to expiry, the long leg still has extrinsic value. I often set my long leg to 3 months away and the short leg about a week and try to collect premium weekly in case of weekly options and keep on rolling the short leg to collect premium. This also allows me to adjust my short leg and keep it out of money.
Can't believe how clear and concise this explanation was. I really liked it!
I have been playing with diagonal spreads on bitcoin and ethereum this year (I guess I need more risk than a sane person can handle). And I think you can improve on the concept by buying f.i. a three month ITM call and keep writing ATM weekly options on that call. Even is the price stays flat, you'll win back the purchasing price of the long call and then some. However, when price moves in your direction rapidly, the short call loses more value than you gain with the long call. This because the delta and gamma of the long call are lower than the delta and gamma of the short call. Fortunately you can sell less ATM calls to prevent the loss from such a scenario. Actually, the only scenario where this strategy loses is when prices move against you rapidly. Which does happen, but not very often. Maybe it's even possible to hedge against such a scenario by also opening a contrarian diagonal spread.
I think your explanation of the profit potential is erroneous. You said that the width of the spread minus the debit you paid is your profit potential, which is true for a vertical spread. In the case of a diagonal, I don't think the profit potential can really be predicted since the long will outlast the short, and there's no way of knowing what the long will be worth when the short expires. This strategy may be a diagonal, but I look at it as more of a poor man's covered call in a way. Please correct me if I am mistaken. Thank you!
Love how you simplified in less than 8 mins keep the good work.
Incredibly awesome presentation. Well explained, concise, with clear examples and great energy. Comment from a Highly Qualified Educator & Investor. Keep at it.
Nicely done. Clean and clear explanation. Thank you!
this is the video i was looking for nice now i understand Diagonal option trade i did saved this video Thanks sir......
This is a great video. I finally understand diagonal AMD calendar spread better and I will put them into good use. I am looking toward to the next video
Well done again Jim, you convey the message perfectly somehow. Keep up the good work.
Hi Jim
If I entered Long Call Diagonal Bullish Spread than my trade will be entered for a debit. In such case do I required margin for particular trade? If yes, can you please let e know the calculation for margin requirements?
For Example:
MSFT Stock at $252.46 (CMP)
Purchase ITM 245 call for $13.52 (16-Jul)
Sell OTM 262.5 call for $1.76 (18-Jun)
Net debit = $11.76 on a 17.5 point-wide long call diagonal spread
Not sure why the diagonal is compared to a vertical here because in a certain area it can make more than the width of the spread
It's like the calendar part of the trade was completely ignored This is only true when the trade is OTM in the profit zone that is the max you can make but when you are closer to ATM you can make more than the width of the strikes Of course that brings in more risk because you have to stay in it almost to expiration but that is also the good part of the diagonal With a vertical when you are near ATM you are at a loss and you have to wait for the trade to expire to realize any gain With a diagonal at the same point you most likely have a gain and you could close the trade or you could roll the short out if there is more time
My long ITM call is two year DTE, how the hell can I sell a near call within 75% of the width?
I didn't know about paying 75% of the width. Thank you! (Don't you think brokerage firms should reduce the fee for contracts on
stocks under $30 bucks? You have to buy more contracts, so they should charge
less!)
Thank you Sir for your nice explanation 🙏🙏🙏
Awesomeness, thank you.
Very helpful with the width of the strikes pricing
Jim, opinions on entering the diagonal at a credit, to prevent locking in a loss?
Couple of thoughts:
1. Taking the credit likely increases risk and capital requirements -- such as financing the diagonal with uncovered OTM options
2. It's sort of contradictory - the long calendar/diagonal can capture vega (benefits from expanding IV), yet if you believe IV will expand, why would you be selling premium before its price increased?
Your own analysis may provide compelling answers to these points, so these are simply thoughts to consider
Good video. Talking about debit being 75% of width, should we adjust the cost for intrinsic value of the ITM option premium? That is, Debit minus intrinsic value
Can you explain what the adjustable interest is when you’re looking at price slices and analyzing the trade in Think or Swim? I’m pretty sure VOL adjust is if you’re looking to see how volatility rising would effect your calendar/diagonal. Thanks man
Sounds like a feature to observe interest rates affecting theoretical option price.
You might compare that setting on long-dated options against options expiring in the current year.
If possible, include the greek "rho" in your analysis to more clearly see the relationships between interest rate, rho, and option price
Hello Dr. Jim - I have been watching tons of videos - regarding rolling out in time - what if the next decent Expiration is not until June (March 19 current position). Do the mechanics change? Everything else with the mechanics works but boy...such a long way out! (The trade is a strangle not a diagonal spread but this is your most recent video)
When rolling to next week, can I sell ITM option on the short side? overall net debit will surely be lesser than width of strike
Nice video but I have a question
For bullish , why can we make it as both the short and long call at OTM while the short one is closer to the market price ?
E.g apple at 130
Jan short call at 135
Feb long call at 140
Wouldn’t that reduce the paid premium which in turn increase the return ratio ?
Isn’t this a PMCC strategy.
Can you explain batman spreads? Im having trouble finding a good example
that was an awesome video! subbed! please keep up the good work, thanks!
Tom had recommended in a previous segment that diagonal spread be 30 delta / 30 delta strikes.
Interesting, thanks for the info 👍
where do I find this entire series ? Also - a lot of the Learn Center courses have been showing Coming Soon for - quite sometime.. ty
Thanks!
short and good
You for got one station, it also a poor mans covered call. Sold puts against it and 42 strike foe 2 months .. the I wish I still had it with the 30 days that should be on it. WOULD HAVW COULD HAVE, SHOULD HAVE.
What if we do diagonal spread on the same strike
This is not called Diagonal Spread , it is called Calendar spread
Can also let the short near dated option expire worthless too
What isn't especially clear in this video is: OK, it's a debit spread, the long leg is in the money and of longer duration. The short leg is OTM and shorter term. If the play goes the wrong way relative to your expectations, **the loss on the ITM option will far outrun the gain on the short leg** and you will work your ass off to overcome that, if you even can. Yeah, you can "roll" the option, this means "you have the freedom to roll the short option" BUT IT IS AT A LOSS ANY TIME YOU DO SO!
Priceless , I feel so Armed facing any market battle with Dr.Jim and Tastytrade Management Concepts.
some example would have been great.
Horrible sounds, you need to fix your microphone.
Watching this video a year after upload is bizarre, as AAPL is trading at exactly $129.56, and February and March would be the appropriate months for this trade at the current time.
Wtf is wrong with the mic
Tasty trade is a content provider. Get a guy to fix your volume levels. Way hard to listen too
Whats wrong with his mic
How about an introductory lesson? Your know for the majority of us who have no clue what a spread is let alone a diagonal one is!