Diagonal Strategy Summary

The diagonal strategy I follow was popularized by Matthew Haley of Investools. It can be setup as a bullish trade with calls, or a bearish trade with puts.

First buy the long option. Long side is deep ITM, with delta 0.69-0.75. The long option is about 3-4 months out.


Sell the short side OTM, with delta 0.28-0.32. The short is front month or the next month if front month is very close. The difference between the long and short delta should be around 0.4 at this point.


Rolling is the key to making a profit in a Diagonal Spread

• Buy back the short option and sell another at any point if the value is now 20% of what you sold, or 33% if the value drops very rapidly (a day or two)
• Buy back the short at any time if it is worth less than $0.10
• Buy back the short option if the delta decreases by 0.2 or more
• Buy back the short option if the delta reaches 0.65 or is within 0.15 of the long option delta
• If the underlying is moving away from you (against the long), sell another short!

If the underlying is trending strongly in your long option’s favor, leave it uncovered (buy back the short option) until the price reverses.

Roll the long when the delta gets to ~-.85 in a bearish trade or .85 in a bullish trade.  If the trend looks to be continuing, roll out to the next expiry that has the same relationship to earnings.  If the trend is changing, but not yet reversed, roll closer to ATM, and select a new strike with a delta of approximately -.69 -- -.75.  You will either get several months additional time for no cost, or additional contracts for no cost, either way allowing more shorts to be sold for the duration.

PCCRC Strategy Summary

In August 2009 I begin trading my current option strategy which is called the PCCRC. This strategy was popularized by Juan Sarmiento at OptionsVet.com. The strategy looks to set up a ratio calendar trade on stocks that have reported earnings recently and have jumped >10%. This is a low risk strategy that benefits from 3 factors that affect options positions.

First it benefits from volatility rising (Vega). Generally implied volatility peaks just before an earnings announcement, then falls dramatically, then slowly rises over the next 3 months until the next earnings release. I want to get into the trade right after earnings when implied volatility has spiked lower, and hopefully make some profits as volatility rises in the weeks ahead.

The second way this trade benefits is from price movement (Delta) either up or down. This is because I am using a 2:1 ratio of long to short options in my calendars, so with a big move in stock price my long options increase in value more than the short options lose value because there are more long options than short options . This gives me limited risk but unlimited reward potential if I am lucky enough to have a large price move up or down.

The third factor that slightly affects the trade is time (Theta). The trade is slightly Theta positive, so over the course of a month I can make a small profit due to the erosion of time value of my short options. So if the stock doesn't move, and volatility doesn't change, I still will make a small profit due to the passage of time.

The risk of the trade is if the stock goes down (the trade starts slightly bullish) and volatility also goes down. Usually volatility goes up when a stock goes down, but if it doesn't I will have a losing trade. It should be a small loss though. From what I have seen thus far, you generally will have several positions with small gains, a couple with small losses, and a gem or 2 with a large gain. I plan on posting some of my trades here including the closing of the current open trades as well as new trades I find.

Below is a picture of a risk graph of a typical PCCRC. When viewing the risk graph keep in mind that if volatility goes up, the entire graph shifts upward. After a few days a successful PCCRC trade will often have the entire risk graph above the 0 profit line.