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Low Volatility, Bear Put Diagonals

Best Practices

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

For those looking to get short the market while also getting long record low implied volatility, diagonals are one way to play the market. In today's Best Practice, Tom and Tony cover the advantages and disadvantages of trading them.

What are they?

Bear Put Diagonals are a cross between calendars and vertical spreads. More specifically it is being short a lower priced put in the near month and long a higher priced put in the further away month.

Advantages

A huge advantage of using them is the ability to profit from increases in implied volatility. They also have a high probabilities of success when done in low implied volatility.

Disadvantages

They tend to be more expensive than regular verticals – it is not uncommon to pay up to 75% of the width of the strikes. Diagonals also can be "slow moving". Another disadvantage is the complexity involved – not only are you making a directional assumption, but you are also making a implied volatility assumption.

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