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Adjustments To A "Long-Term" Diagonal


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mks212
NY, NY
 
Posts: 12 since Apr 2015
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I have been placing diagonal trades for a bit and have had moderate success. The idea is to sell weekly puts against a longer term long put and do this each week until about a month before the longer term put is 30 days from expiration.

As with many things in options trades, adjustments make quite the difference.

Let's use this as an example.

XYZ at $150 at time of trade entry
Long 145 Oct Put for debit of $4.00
Short 150 Aug Put for credit of $2.50

The ideal scenario is that the stock price barely moves and you close the short 150 put for $0.10 or so, and then sell the following week's $150. Sometimes this happens and it's great.

So far, no adjustments needed.

Let's say the stock moves sharply higher, to $160. In that case, the spread between the short ATM put I would like to write, and my long put is too large for comfort. I will sell back the Oct 145 Put (for a loss) and buy the 155 put (for a profit) and then sell the next weekly 160 put. Hopefully, this doesn't happen so often that the losses overcome the gains from the weekly sales. In my experience, it hasn't.

Last scenario, let's say the stock drops from 150 to 140. This is the case I am having a hard time with. Right now, I buy back the 150 put I sold and sell the next week's 150, hoping that the stock will rebound and I will make a large gain that makes up for the loss I took. If this happens more than 3 weeks in a row, the losses rack up quick. It's true that the 145 put buffers the loss which is the purpose of buying it in the first place.

Any other suggestions for how to adjust this position in light of a prolonged down move?

Thank you.


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