This is my second month with a diagonal to test them out (jumped up and did a triple diagonal this time). I also like the easier feeling I have about market moves, it fits my laid back style. I actually cheer for the market to chase one of my short strikes. The hard part is figuring out what, if any adjustments to make because you have so many choices. The part I don't like about diagonals is the margin it takes up. I am looking forward to ToS adding options on futures later this year or next year so that I can do what Coach is doing, using regular expiration and end of month expiration options for adjustments.
This is why ppl seem to like diagonals I can tell you what I've done and what I am looking to do. I have 1330 shorts as well. Its important at this time to have your own thoughts on market direction and strength. The fact that 1330 has only a 20%probability of ending in the money tells me the Greeks/MM's aren't buying the rally...yet. 8 trading days don't leave to many options, however if next week has some volatility in it and some down days as well as up...THEN I might look to first sell a spread farther out say 1340/1365 on an up day then close the 1330/1345 on a down day and sell another put spread. There are risks to this you may not be willing to take. Another thought is to actually roll out to October now for a credit and plan to close later. Last remember Theta will start to help big time next week and you may be able to close or at least roll the 1330 to say 1340 for min damage if we do have a down day.
To my vertical spread traders... I have not forsaken you . Remember I had a extremely nice IC for August which I rode to expiration. The time between AUG and SEP expirations is kind of short so I was not finding anything worthwhile for SEP. OCT expiration is coming into view and I am waiting for a defined move in the market to open credit spreads for OCT. Short strikes I am looking at are around 1225 or so on the put side.
Doing well Coach, can you make some comments about your experience with diagonals vs. verticals ? And diagonals - how do you determine near month/far month ratio ? Anything special or just simple "accounting" ?
I am averaging 5% monthly returns so far this year with monthly return averaging 3% and 8% just trading FOTM Put and Call Net Credit Spreads on the SPX Index. I have read books, paper traded for 6 months and now use trading tools to help me choose strike prices. Is their any reason I should spend time researching and leaning about diagonals? Are they any safer than FOTM verticals? Can I earn a higher monthly return trading diagonals? I am not paying to much attention to ths board anymore because of my focus on verticals but I want to insure I am not passing up and safer option strategy.
Not better, just different. The sag in a double diag falls in the middle -- you like movement towards your shorts. In the IC, you want the market to stay away fr your shorts. I found myself losing sleep over my IC as the market makes a move. Just a personal preference. If you are making a consistent 5%, keep doing what you are doing. I was making 5-10% on the IC, until it started trending. I had prob with making adjustments, and lost money.
I'm certainly not willing to abandon a winning strategy either. This trade is the centerpiece of my overall trading and so far has been the lions share of my profits YTD. However I've followed the markets for many years and have seen some pretty vicious ups and downs which has and could take out even WFOTM spreads. The other phrase I take to heart is what I have heard from experienced traders..."Every strategy has its tradeoffs...no free lunch." As Murray has pointed out several times diagonals are primarily a VEGA trade. The put diagonals will work when IV is low and then goes up. Coach has had great success on the call diagonals with shorter time frames. The reasons I try to learn and understand different strategies is that when there are different opportunities ie. the market gets very volatile or shows a definite trend I want the weapons that are most appropriate. To answer your question...yes and no Personally I do see some advantages in the diagonal over the CS which I think make them "safer". Much easier to adjust, you can close them for very little debt. Closing credit spreads when they have gotten away from you can get VERY expensive. There does seem to be less "worry" factor. Your FOTM Credit Spread isn't so far when the SPX moves 100pts toward your strike creating a few sleepless nights thinking of all the possibilities. Again I'm a strong believer in doing what works until it doesn't work, but the day may come when this isn't the best strategy for a time period and if you have done and feel comfortable with some other strategies then your able to continue to make money.
Verticals and Diagonals are different and you shoudl always trade what you know and feel most comfortable with. Because of the skew, I find I get better positions and credits in the call spreads using diagonals and still prefer verticals for put spreads. I am not abandoning verticals as I still like them for deep OTM puts. For calls, the verticals offer too small credits for the distance OTM I want to go. However, with respect to diagonals, I can go closer to the money and actually do better given the nature of the diagonals. So therefore I still will use vertical spreads for S&P puts and diagonals for S&P calls (except in my retail account where I do not have access to options on futures ).