Introduction of the most profitable and conservative options trading strategy - Diagonal Calendar Spread.
Diagonal spreads are a great long term way to both invest with options and produce some monthly cash flow at the same time. Many traders actually don't know much about how powerful and flexible these diagonal spreads can be for an option trader.
Diagonal option spreads are established by entering both a long and short position in two options of the same type (so either two call options or two put options) but with different strike prices and expiration dates. Again take a second to digest that and read it again if you need to. In effect, the strategy is similar to a covered call, except that a long call is substituted for the stock.
Spreading Time And Strikes
This strategy gets the name "diagonal" because it combines a horizontal spread, which represents differences in expiration dates, with a vertical spread, which represents differences in strike prices. You could even think of it as the off-spring of a calendar spread and a vertical spread.
Simply put once again to drive home the point, you buy an option that will not expire for many months and then sell options that will expire in the front month against the current long option. Thus you get exposure both in difference contract months and strike prices. Starting to make a little more sense now?
A Quick Word On Volatility...
Lots of books and other websites talk about various trading strategies that are designed to benefit from changes in volatility. All of that is good and well, but sometimes as an investor in options, my interest is in gaining leverage and managing risk on a some-what directional basis.
There is no arguing that volatility needs to be watched closely, but when the premiums make the diagonal spread unattractive, it's a good idea to do your homework first before entering a position for the next couple months.
I've been told by tons of people that you've got to either have a lot of money or a really killer system to trade options and win. Some new indicator or signal that will transform your portfolio.
And I'm sure you've heard the same thing and are sick of these expensive, dead-end courses and websites wasting your time and money.
Honestly, there is no "magic secret" to trading options. It simply comes down to an understanding of risk management, option pricing and strategy selection.
Instead of learning these lessons the hard way (i.e. losing your shirt in the market), why not take my free channel video course as I cover each area in detail.
And some more detailed description:
A calendar spread gets it's name because the strategy involves two options that expire in different months. The strategy is created with the (short) sale of an option that expires in one particular month while simultaneously owning (being long) another option that expires in another month. The options must be on the same underlying security. The strike prices can be the same or different.
If the strike prices are the same, it's a "horizontal spread" and if they are different, it's a "diagonal spread".
A horizontal call spread may look like this:
Long XOM June 50 call
Short XOM July 50 call
A diagonal call spread may look like this:
Long XOM October 50 call
Short XOM June 60 call
The specific type of Calendar Spread that I use quite often is the "diagonal call spread". It has made members of my option trading service lots of extra profit, and has saved us from taking some losses when things didn't go our way.
This is by no means a complex strategy that you should feel intimidated by. As a matter of fact, it's really quite simple.
Pay close attention, because not only are we in a market that is 100% perfect for a strategy like this, but this strategy can turn a 150% gain into a 300% gain while reducing your risk exposure at the same time. The strategy works best when you are fairly neutral on the near-term prospects of a stock, but still bullish over the longer-term.
For those of you who sell (or write) covered calls against your stock positions, this should be an especially easy concept to grasp, since it is almost the same
thing. The difference is that, instead of selling a call option against a stock that you own, you are selling a call option against another (longer term) call option that gives you THE RIGHT to buy a particular stock.
Okay folks, here we go ...
As you may know, the majority of option traders are speculating on market direction, even though they're wrong most of the time. Usually you hear about the most basic form of option trading, and that is when you buy a call option at one price (the call gives you the RIGHT to purchase XYZ stock at a designated price sometime before its expiration date), and then hope the stock moves higher, which will push that call option up several percentage points higher.