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.