This trade is set up as a credit spread just as last week’s example of the OTM Call Diagonal.  The Short Put is placed in the front month near the money and the Long Put in the next month one to two strikes below the Short Put.  It is a diagonal because it is a two legged position in different months and different strikes.  The trade will profit anywhere above the breakeven of the near month Short Put plus the credit from the spread and possible Long Put appreciation. 

 The trade begins to lose rapidly as the underlying moves below the Short Put strike price.  Volatility crush on the back month Put can also reduce the breakeven point below the Short Put strike price, so it is best to pay attention to the implied volatility of the Long Put when implementing the trade.  The fact that the Long Put is further OTM should mitigate some of that risk because Vega is less.  Review the risk graph and you should gain understanding of the risk and reward associated with this trade.  Best,  Robin

Bookmark It

Hide Sites