What is a Diagonal Spread?
A diagonal spread is a stock option strategy whereby an investor opts to buy and sell two different option holdings within the same class of stocks at different strike prices and with different expiration dates. A diagonal spread, therefore, is predicated upon buying and selling two calls, or purchase rights, as well as buying and selling two puts, or selling rights, of the same options simultaneously. The term diagonal spread is unique to stock options. A stock option is permission, granted by a signed contract, to the legal holder of a share or shares of stock by the company issuing the stock(s) to purchase the company’s stock at a specific price stated on the option contract and within a specific time frame. Stock options are purchased — in some cases earned — rights to take advantage of a stock’s future dividends if the price of the stock rises or risk that advantage if the price falls at the end of the expiration date of the contract. A diagonal spread is designed to defray risk
A diagonal spread is a spread that allows you to produce a monthly income from the stock market and at the same time being able to profit from appreciation or depreciation in the stock. Ok so how does it work? Simply put you buy an option that will not expire for many months. You also sell an option that will expire in the front month. For example say you buy a call option 10 months out for $12. Then you sell a front month call with a higher strike price for $2. Initially you would be down $10, but if you kept selling front calls every month for the 10 months you could be profitable. Let’s say that you sell a front month call every month for 10 months. You make $2 every month and sell a total of $20. That is great, considering you paid $12 and sold $20 worth of calls. That would give you a profit of $8 or 66% after just 10 months, if everything went well. If the stock falls or if you are about to be called out you can easily buy back the option you have sold or sell the option you have
Posted by Pete Stolcers on November 4 In today’s option trading blog I will dicsuss diagonal spreads. A diagonal spread combines an equal number of longer term options and shorter term options with different strike prices. The term actually comes from the way the options were listed in the newspaper. If you connected the two strikes, a diagonal line would run across the page. In a traditional sense, you are long the longer term option (the anchor leg of the spread) and it is closer to the money. By rule and regulation any other combination would involve considerable margin. For instance, if you were long a May 65 call and short an August 80 call, the August 80 call would be considered naked. That would require the highest level of option trading approval from your brokerage firm and considerable margin would be posted. If you were short the May 65 calls and long the August 80 calls, the position is covered, but you would have to satisfy the 15 point margin requirement (difference betwe
Stock And Option Trading. . Swing Trading The $17 Stock Trading System var infolink_pid = 9198; var infolink_link_color = ‘009900’; var infolink_title_color = ‘252667’; var infolink_text_color = ‘000000’; var infolink_ad_link_color = ‘24951E’; var infolink_ad_effect_type = 0; var infolink_pid = 9198; The Diagonal spread can be a very effective way to pull monthly income out of the stock market and keep have long term gain as well. The Diagonal spread strategy is very similar to the covered call strategy. The only difference between the two is that covered calls involves buying the stock, this strategy involves buying the leap. Let us look at an example. We were looking at RTP. It was trading at $275. The stock looked like a good buy. So we decided to buy the $250 leap 2 years away. This cost you $100. Although we are long term bullish on it we also didnt think this stock would reach $300 in the near future. So you sell a short term $300 call for $5. This makes us an instant $5. If the