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training_data/curated/text/3a33556dc1f5c1cae9f7b38a94adfb0f201a6a95ffeec7cc282957e3fb93478f.txt

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+406 Part Ill: Put Option Strategies 
+nificant assumption that volatility and interest rates are unchanged). If XYZ trades 
+higher than llO, the diagonal spread will lose some of its profit; in fact, if XYZ were 
+to trade at a very high price, the diagonal spread would actually have a loss (see Table 
+25-4). Whenever the purchased LEAPS call loses its time value premium, the diag­
+onal spread will not perform as well. 
+If the common stock drops in price, the diagonal spread has the greatest risk in 
+dollar terms but not in percentage terms, because it has the largest initial debit. If 
+XYZ falls to 80 in three months, the spread will lose about $1,100, just over half the 
+initial $2,050 debit. Obviously, the short-term spread would have lost 100% of its ini­
+tial debit, which is only $500, at that same point in time. 
+The diagonal spread presents an opportunity to earn more money if the under­
+lying common is near the strike of the written option when the written option expires. 
+However, if the common moves a great deal in either direction, the diagonal spread 
+is the worst of the three. This means that the diagonal spread strategy is a neutral 
+strategy: One wants the underlying common to remain near the written strike until 
+the near-term option expires. This is a true statement even if the diagonal spread is 
+under the guise of a bullish spread, as in the previous example. 
+Many traders are fond of buying LEAPS and selling an out-of-the-money near­
+term call as a hedge. Be careful about doing this. If the underlying common rises too 
+fast and/or interest rates fall and/or volatility decreases, this could be a poor strategy. 
+There is really nothing quite as psychologically damaging as being right about the 
+stock, but being in the wrong option strategy and therefore losing money. Consider 
+the above examples. Ostensibly, the spreader was bullish on XYZ; that's why he chose 
+bull spreads. If XYZ became a wildly bullish stock and rose from 100 to 180 in three 
+months, the diagonal spreader would have lost money. He couldn't have been happy 
+- no one would be. This is something to keep in mind when diagonalizing a LEAPS 
+spread. 
+The deltas of the options involved in the spread will give one a good clue as to 
+how it is going to perform. Recall that a short-term, in-the-money option acquires a 
+rather high delta, especially as expiration draws nigh. However, an in-the-money 
+LEAPS call will not have an extremely high delta, because of the vast amount of time 
+remaining. Thus, one is short an option with a high delta and long an option with a 
+smaller delta. These deltas indicate that one is going to lose money if the underlying 
+stock rises in price. Consider the following situation: 
+XYZ Stock, 120: 
+Call 
+Long 1 January LEAPS 100 call: 
+Short 1 April 110 call: 
+Position Delta 
+0.70 
+-0.90