Module 2 Session 6

VIDEO: 6:40 MINUTES

This session continues to define various trade strategies:

• Diagonal Bull Call Spread
• Diagonal Bear Put Spread

Diagonal Bull Call Spread

• Type: Debit
  
• We BUY the options (pay the premiums)
  
• Implied Volatility: Low – 20% or less
  
• Direction Bias: Bullish
  
• Volatility Bias: Aggressive Long Volatility (ALV)
  
• Risk/Reward Profile:
  Max Risk: Limited to total debit (premium paid for long unit minus credit received for short unit)
  Max Profit: Limited (Distance in rise of underlying’s price from entry to location of offset plus credit received for the offset unit)
  
• Greek Values:
  
  • Position Delta: Positive (+25 minimum)
    
  • Position Vega: High Positive (profit from rise in volatility)
    
  • Position Theta: Positive
    
• Position construction:
  ANCHOR: Buy 1 ITM or ATM Call expiring in more than 90 days while in a demand area
  OFFSET: Sell 1 OTM Call expiring in less than 60 days with strike equal to top of expected range or predefined exit point
  
• Best Case Market Condition: Advantage is ability to provide and offset to Theta decay, a hedge against further fall in volatility and additional pay for your willingness to assume the risk associated with owning the position. Provides the opportunity to capture any upside movement in price as far as your short strike. It is preferred for price to reach the target slower to allow us to collect more of the theta decay from the short unit. However, a fast rise in price accompanied by a rise in volatility may provide more profit than theta decay alone.
  
  
  

Diagonal Bear Put Spread

• Type: Debit
  
• We BUY the options (pay the premiums)
  
• Implied Volatility: Low – 20% or less
  
• Direction Bias: Bearish
  
• Volatility Bias: Aggressive Long Volatility (ALV)
  
• Risk/Reward Profile:
  Max Risk: Limited to total debit (premium paid for long unit minus credit received for short unit)
  Max Profit: Limited (Distance in fall of underlying’s price from entry to location of offset plus credit received for the offset unit)
  
• Greek Values:
  
  • Position Delta: Negative (-25 minimum)
    
  • Position Vega: High Positive (profit from rise in volatility)
    
  • Position Theta: Positive
    
• Position construction:
  ANCHOR: Buy 1 ITM or ATM Put expiring in more than 90 days while in a supply area
  OFFSET: Sell 1 OTM Call expiring in less than 60 days with strike equal to bottom of expected range or predefined exit point
  

Best Case Market Condition: Advantage is ability to provide and offset to Theta decay, a hedge against further fall in volatility and additional pay for your willingness to assume the risk associated with owning the position. Provides the opportunity to capture any downside movement in price as far as your short strike. It is preferred for price to reach the target slower to allow us to collect more of the theta decay from the short unit. However, a fast rise in price accompanied by a rise in volatility may provide more profit than theta decay alone.
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