• Connect

Diagonal Put Option Strategy

Diagonal Put Option Strategy

What is Diagonal Put Option Strategy?

  • Diagonal Put is a modified calendar spread involving different strike prices of different expiry. It is a combination of calendar spread (same strike; different expiration) and vertical Spread (same expiration; different Strike). Diagonal Put can be created by selling near expiry (ITM) Put and buying next expiry OTM Put.

When to Execute?

  • Diagonal Put needs to be executed when we have a neutral to bearish view of the underlying in near term. Overall expectation from this strategy is underlying to close at or below the short Put at current expiry as short put will expire worthless and long put will lose some of its intrinsic value.

What is the Trade?

  • Diagonal Put can be created by selling near expiry (ITM) Put and buying next expiry OTM Put.

What will be maximum profit?

  • Maximum reward under Diagonal Put is value of long Put option on expiration of short put when the stock trades near the sell put strike less initial outflow to build the strategy.

What will be maximum loss?

  • Maximum risk on the trade is limited to net debit to built the strategy.

What are the advantages?

  • Generate monthly income. . Can profit from range bound stocks and make a higher yield than with a Covered Call or Naked Put.

What are the disadvantages?

  • Capped upside if the stock rises. . Can lose more than initial outflow on the downside also can lose on upside if the stock rises significantly. . High yield does not necessarily mean a profitable or high probability profitable trade.

Example of Diagonal Put:

  • Suppose Nifty is Trade 15800. Nifty future price is 15800. Diagonal Put can be executed by selling PE current expiry 16000 (ITM) PE @ 230 and Buying Next Week expiry 15700 PE@ 125 (OTM) Max Profit will be earned if market stays around at or above 15815.00