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

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