Name: Diagonal Spread w/ Puts
Setup: Sell (short) out-of-the-money Strike B put (front month) and Buy (long) Strike A put at a later month (back month) and When the short put expires sell another put at Strike B
Bias: Neutral to Bullish
Break-Even: Due to the fact that it is played over two different expiration months determining an exact breakeven point is difficult
Max Profit: Limited: Credit received from both short puts minus the debit paid for the Strike B put
Max Loss: Limited: Strike A – Strike B + Debit paid
Margin: Margin equals the difference between strike prices
Time Decay: At the beginning time decay will be on your side as your short put will lose value quicker. This is the equivalent to a calendar spread w/ puts. However, after the first short put expires and you sell another put time decay will be neutral as it will eat away at both the long and short options.
Implied Volatility: Implied volatility’s effect is mixed in this case. On one hand you want volatility to increase because it will drive up the price premiums so you will receive a greater amount on the 2nd short put. However, you do not want the stock to move a lot as this is a neutral play.
Notes: None at this time
Featured in Trade Review: None at this time
