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Trading Diagonals

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

Tom and Tony discuss how and when to trade diagonals. A Diagonal Spread is a combination of a vertical spread and a Calendar Spread. Diagonal spreads are effective for their congruency to covered calls or covered puts.

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. We must be mindful our initial debit is not greater than the width of the strikes. Also, while the strategy has positive deltas, there is a negative profit expectation if the stock moves too far to the upside.

Similar to normal debit spreads, we shoot for 50% of the width for management. When purchasing deep in-the-money options for strategies such as covered call/covered put diagonals, paying up to 75% of the width of the strikes is normal.

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