Options Jive

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Mechanics of Diagonal Spreads

Options Jive

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

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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