So, I've been doing credit vertical spreads for awhile and I wanna try some diagonals, to see if I can get more profit. FOr those with experience in these trades, how does one close out the trade if the short is ITM and the long is OTM? Does one sell the OTM and then let the short get exercised? or do you just buy/sell to close everything? Example, Say you are at expiration day with July stock XXX ending at 48 and you sold to open July 50 put and bought to open Aug 45 put...how do you close this out?
Simple. Just btc the july 50 and stc the aug 45 and then look for a new trade. You may actually have a profit, depending on your entry debit. Another option is to btc the short and hang on to the long put if you are now bearish on the underlying, but be mindful that time decay and iv are now becoming an issue with your long. Best daddy's boy
With the diagonal, it might help to look at the embedded vertical and calendar spreads that make up the diagonal. Doing this should give you some insight into how best to manage the position and understand the optimal conditions for initiation, closing and adjusting. As for exercising, only do this when there is good reason to and you aren't sacrificing extrinsic value etc. MoMoney.