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Strategies & Market Trends : Option Strategies
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Thehammer
From: Hank Scorpio2/25/2021 2:46:32 PM
1 Recommendation  Read Replies (1) of 2591
 
To advance the discussion on hedged strategies.

The Diagonal Spread. The conventional wisdom here is that these spreads are set for a debit. Long ITM and short OTM. This is fine as a pure directional play, but if you forget about the directional side of things and just play out the probabilities these debit spreads generally show long term negative returns. That is, you need direction to help out.

I like the set up of a credit diagonal spread. This greatly inhibits return and potential return. The Probability of a profit can be exceptionally high, however. And the bonus kicker here, if the spread is constructed properly the underlying will actually make the spread more profitable as it moves against you - for a small window of time. (IV notwithstanding) Also, the long term expected profit based only on the probabilities is positive.

I have tried a few of these and have made money, but the dollars are small compared to long an option on a buy signal for a trade, as a comparison.

Has anyone actually used this strategy? As an example:

Write the SPY Apr 16 360 put, buy the Mar 19 380 put. $0.90 of credit. Break even at 373. 70% probability of profit and a long term positive expected return. Max return at SPY 380 is $4.70. The kicker? Max. potential loss of almost $20. 1% chance.
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