What..no free lunch ? :eek: Always good to hear your thoughtful dissections of a strategy. I too was actually thinking about these wider diagonals to pay less of a debit and was wondering what the catch was. I like Murray's strikes of 20 or 25 points apart because the delta of the long cancels the short. Not perfectly, but close enough to cancel out the risk when the underlying head towards your short. With the wider strikes the diagonal is cheaper or even give you a credit if you want to but there's isn't the same amount of delta protection from the long option if underlying moves towards your short strike. Hence one would sweat bullets just like a credit vertical scenario. Now to look at FFOTM diagonal.....with 25 wide strikes Just thinking aloud.
I find that having NO OPINION works well for me. I sell call spreads on rallies and put spreads on dips. Because I sell all spreads for a credit, it's painless to pay out some of that cash to cover one of the spreads, if and when the strike is threatened. Mark
Mark, You do have an opinion. After a huge rally, you think the rally is not sustainable (at least not as fast as before). After a sell-off, you think the sell-off will at least slow down. You might not have a precise prediction, but you do have an opinion on the market behavior.
Mark, lets say you started with no position and the market was up and your first position was a call credit spread or diagonal spread opened for a credit. And lets assume the market did not move down after that and continued slowly moving up for the next two months. Does that mean you will just keep selling calls if the market did not move down? Do you also sell larger number of call as the market moves up to cover your threatened shorts? Also what distance would eg SPX have to move before you sold more calls Thanks in advance
The volatility crush is not as big an issue. The diagonal, like the vertical is opened for a credit, but can actually increase in value as the index approaches the short strike with expiration not too far away. The vertical will keep growing as a loss as the index moves to the short strike. So upside moves will affect both differently and the IV crush is not as severe on the diagonal in my opinion. For the vertical, delta/gamma far outweigh the IV changes such that the benefit is lost
Vertical spreads have their place and diagonals have their place. As my current open posiitons show I got a good entry for my put vertical spreads and I got decent positions for my diagonals. I like being able to mix up the two strategies together .
I agree Coach, mixing it is the way to go.. Tried to buy a 1222AUG/1200SEP diagonal yesterday at mid of 2.25 debit but did not get filled. Serves me right for being a tight arse as I didnt add a dime or two to the mid. I think the mid today is arond 2.65 when i looked an hour ago. Currently have a SEP 1325/1335 Call Credit spread and im gettin a little worried already. Sold it when SPX was around 1261 on 25th July. Not to worry .. will implement risk managment when SPX hits 1300. Well i think i will anyway, as I havent had to in the past. Now if only SPX will fall a little... so i can open a PUT credit spread But i do like Mark's strategy of progressively selling more puts or calls as dictated by the market's direction and not having an opinion.
Finally, ToS allows you to superimpose the lower studies on the charts and isolate sectors performance. I've been waiting for that. Now if they'd just get IV data and allow me to superimpose that on the charts I'd be set.
I sell call spreads on rallies - regardless of how bullish I am or how high I think the market is going. After 30 years in this business (most as a CBOE market maker), one thing I know for sure is that my predictions concerning market direction are worthless. Thus, I just keep scaling by selling calls as we rally and puts as we decline. I stop selling when I have either used all the margin I care to use or portfolio risk is sufficient. This method does not work well in sustainable market moves, but has been successful recently. Mark