- To leverage options theta time decay in sideways market when price moves within a specific range within current expiry.
- Logic is to gain from time theta decay of ATM and near ATM movement strikes of current expiry by combining spread with last expiry of the month
- Recommended to apply for stock or index options with good volume and liquidity.
- As compared to butterfly strategy, this strategy may use higher margins , as ATM strikes are used PL also higher.
Steps to setup Diagonal spread strategy
- T1 = Sell 1 lot CE of current expiry ATM strike
- T2 = Sell 1 lot PE of current expiry ATM strike
- Sum up the premium values of both strikes say P1+P2=P3
- T3 = Buy 1 lot CE of last expiry of month at OTM strike having premium value ATM+P3
- T4 = Buy 1 lot PE of last expiry of month at OTM strike having premium value ATM-P3
- Multiply the lots based on personal target risk management levels
- Ensure and adjust the strikes such that current price line is at almost center of the strategy angle tip
Profit levels
- Profitable when Market remains sideways within the breakeven range during the current expiry
- Exit if personal target levels reached
- Exit at breakeven if 70% of threshold reached
- Exit at full profit on current expiry date
- Review and trail stop loss every day once as per personal profit gain levels
Loss
- Loss when price nears breakeven points
- Exit at breakeven points
- Exit at personal Stop loss levels breach
Interim Adjustments
- When price reaches around 70% of breakeven levels exit and reexecute the steps adjusting only the ATM strikes of current expiry , this will lead to carry forward to next cycle with minimal profits or loss.