Example: -XXX July 31st SHORT PUT +XXX Sep 31st LONG PUT I believe the concept is you want it to move away from your strike prices so the earlier option (with more premium will expire faster) but not too much or you'll be looking at a bigger loss in the long one. I find it extremely painful when it moves the other way. When the earlier option expires ITM even nearing the strike of the long term one, there isn't much premium gained! What I do next is sell another option (keep the long term) that is NTM and hope it'll go my way. Sometimes even when it does, the long term option which I bought for 2 weeks now start dropping value like crazy. This is frustrating to say the least, but hey at least we're doing "advanced" strategies right? What do you normally do? Would you exit the entire position or roll the short term option? Let's use the SPY for example if you were to apply this strategy. (It's been going up)
Earnings IV play. The idea is to offset the cost of the post-earnings Sept 31 options by selling the pre-earnings July 31 options
Trading combinations with different expirations are tricky, not for amateur beginners. Calendar is a special type of diagonal, same strike different expirations. Read this: https://www.elitetrader.com/et/threads/terrys-tips-a-cautionary-tale.55017/
There’s a few things in your post that I noticed right away. first you said “What I do next is sell another option (keep the long term) that is NTM and hope it'll go my way” you shouldn’t be hoping .. although we all “hope” a trade works out, instead you should build a foundation, a blueprint, a mechanical way to execute your trades. If X occurs, you’ll react with “Y” etc. also, it seems that you are trading diagonals to benefit from a directional move in the underlying? Why not just trade the stock instead? Or why not just buy long calls/puts?
Because I thought I found free lunch: I could sell near call/put to pay for far long call/put and got my long for free or almost free. I bought the book written by Terry on his calendar/diagonal strategy, said you could easily earn 36% return a year no sweat. He had a subscription base service to call out his trades in real time for $19.95/mo. You are correct, if I am so good at directional, it is more profitable trading the underlying or straights instead of playing with combinations, at least for me. Maybe OP can do it.
I would simply exit the combination and call it a day because my bullish assumption was wrong. Rolling increases my risk. Unless you are OK with increasing your risk and think your original assumption is still correct. In your example on SPY you said it's been going up. In that case I buy SPY or buy call or sell puts
That's assuming the trade doesn't turn around. It increases your risk slightly because your Long term option will not gain as much premium as the value you lost on the short but it's still better than being in the same expiration. If it goes in your favor, it can't be too bullish or you'll lose too much premium. My assumption is always going to be bullish right now until the election. But there's so much going on right now it's almost like the Market is looking for the prefect time to pull a Dec 2018 again. Using SPY with a very basic perfect scenario: *On Monday I buy a put that expires at the end of the week 1 SD away. I sell a put that expires same day that is At the Money. *By End Of Day - I was right and put expires worthless, I sell another one that expires Weds. *Wed expires worthless. I finally sell the last one that expires Friday. *Friday ends Everything expires worthless. I'm not going to discuss if this was to go against me on any of those 3 days or this post will turn into a book. SPY has been closing with green candles for weeks now so this strategy is not impractical. The million dollar questions is - Would I have made more money if I just sold a same expiration spread? And was my risk lower or higher? I guess I'll find out once I try this on Monday. If I was "hoping" we wouldn't be selling spreads. We sell spreads so we can hope for the best but is prepared for the worst.
In other words you think your original assumption is still correct. In that case, why not just hang in there?
Because 2 things can still go wrong: 1) trade goes agaisnt you, you'll lose all your profits from expired put but it'll be significantly less than a vanilla spread. 2) underlying goes too much in your direction, the premium from the long will lose more than the new short. It's a tough balancing act.