21 lines
1.2 KiB
Plaintext
21 lines
1.2 KiB
Plaintext
Diagonals
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Definition : A diagonal spread is an option strategy that involves buying one
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option and selling another option with a different strike price and with a
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different expiration date. Diagonals are another strategy in the time spread
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family.
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Diagonals enable a trader to exploit opportunities similar to those
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exploited by a calendar spread, but because the options in a diagonal spread
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have two different strike prices, the trade is more focused on delta. The
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name diagonal comes from the fact that the spread is a combination of a
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horizontal spread (two different months) and a vertical spread (two different
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strikes).
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Say it’s 22 days until January expiration and 50 days until February
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expiration. Apple Inc. (AAPL) is trading at $405.10. Apple has been in an
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uptrend heading toward the peak of its six-month range, which is around
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$420. A trader, John, believes that it will continue to rise and hit $420 again
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by February expiration. Historical volatility is 28 percent. The February 400
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calls are offered at a 32 implied volatility and the January 420 calls are bid
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on a 29 implied volatility. John executes the following diagonal:
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Exhibit 11.11 shows the analytics for this trade.
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EXHIBIT 11.11 Apple January–February 400–420 call diagonal.
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