25 lines
1.3 KiB
Plaintext
25 lines
1.3 KiB
Plaintext
238 • The Intelligent Option Investor
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Short Diagonal
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RED
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GREEN
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Downside: Undervalued
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Upside: Overvalued
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Execute: Sell an ATM call option while buying one to cover at a
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higher price (short-call spread) and simultaneously buy
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an OTM put option (long put)
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Risk: Sum of put’s strike price and net premium paid for call
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Reward: Amount equal to the put’s strike price minus any net
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premium paid for it
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Margin: Amount equal to spread between call options
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The Gist
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The diagram for a short diagonal is just the inverse of the long diagonal and, of
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course, looks very similar to the risk-return profile diagram for a short stock—
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accepting upside exposure in return for gaining downside exposure. The gist
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of this strategy is simply the short-exposure equivalent to the long diagonal, so
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the comments about the long diagonal are applicable to this strategy as well.
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The one difference is that because you must spend money to cover the short
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call on the upside, the subsidy that the option sale leg provides to the option
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purchase leg is less than in the case of the long diagonal. Also, of course, a stock
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price cannot turn negative, so your profit upside is capped at an amount equal
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to the effective sell price. This investment also may be ratioed (e.g., by using
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one short-call spread to subsidize two long puts). |