I rolled it today. Just for the sake of science, I'm going to post to until this thing expires or I decide to close out the position completely. I rolled the 262.50 Short Put to next week at $245 (below my LONG because I thought today was going to be another bad day). Instead it rallied and I had to roll it up again to 255 (next week expiry) for $12.80. Snow closed today at 253.5 so you can imagine how much GAMMA is in this short PUT. No matter how much the Theta decays it will not be more than the gamma if the stock goes my direction. If it goes down again next week, I'll just keep adjusting the strike price while never touching the 255 LONG PUT. I'm not sure if this is any better than just resetting and buying a same date expiration put spread but we'll see.
Actually, I meant a Short Put Spread where you buy the lower, sell the higher strike. That "earns" theta. Sorry for the loss. I hope my comments don't detract you from the essence of "the bet" that you are trying to put on. I am just opening up ways of thinking about the trade. So, your constantly short the front month. Is it due to the idea that "you want option income constantly rolling in"? That idea is perpetrated by a lot of option education sites and is very dangerous. What you desire, lower loss convexity and theta gains are not compatible. Granted, you found a structure that provides both. As a rule, you are paid to bear risk and you may pay to hedge risk. The markets are very efficiently priced and getting it both ways comes at a dear cost. Like I said, I didn't have a good handle on the trade. I'll shut up for awhile to encourage others to chime in. Your structure remains: "interesting".
I didn't lose any money on this "yet" because I'm just going to keep rolling the front options until both options are on the same expiration date. If you see above, I posted what I did today. So we'll see. I don't have any modelling software, I'm just doing this strictly off what I do know thus far and I don't mess with greeks/vol that much. I just know the front option will always gain more than the later month if it expires near the money. My maturity for the LONG is in March, so I have 6 more weeks of rolling before it expires. I don't see how it's dangerous though, this has the same risk profile as a put spread, (maybe a little safer.) How do you see diagonal spreads being used? Do traders just get out of both options together when the front month expires? That can't be, there is too much flexibility to call this method experimental.
Have you considered taking assignment? You would have long stock at $262.5 and long put at $255. I guess you could sell calls against the stock if you "must fight" theta.
long stock + long put = Synthetic long call He wouldn't even break even from selling the call because the put he bought would be at a higher IV than the call he sold. Just a ton of lost edge. I'm out. I just couldn't resist that one. The guys try to keep everyone reminded. It is verging on altruism. We really should be taking your money.
Yes you can get assigned, but the risk profile is the same. Say I get assigned the put. I own 100 shares of XYZ. 1) I get to collect all the theta value 2) If the stock goes up, I win, if the tanks, my long put is still there. As for the Theta decay.. I don't think neither of you know the short put is going to decay faster than my long as long as the underlying is between the 2 strike prices. I don't need to sell a call to gain theta.
If you hold shares and the stock tanks, you will not be able to sell short puts. So getting assigned changes the trade to be a directional bet(because you are holding a synthetic call and hoping for stock to rally). It seems seasoned options traders here are very much against directional trading.
I don't know about the options community here. I use options to do directional and if it goes down I should be losing money because that is the opposite direction of what is intended. If it goes down like you said and I get assigned, I would probably just exit and take the loss. If I get assigned but the stock does not tank, I'll just sell another put. Remember if you get assigned you collect all the premium from the short put so that helps a little bit. But people are not stupid they will never assign unless there is a dividend coming up. I check for those. No, you can't tell. You can make some good assumptions at what the spread would be worth using modelers, but those are predictions.