Intermediate to advanced options strategy knowledge

Views 1864 Sep 14, 2024

Short Diagonal Bull Put Spread

Usage scenarios

When you expect the stock price to fluctuate steadily in the near future and fall in the future, you can use put options to measure the long diagonal bull call spread.

How to build

  • Sell a recent month's put option with a higher option price

  • Buy a long-month put option at a lower exercise price

The underlying assets and quantity of the two options are the same.

Strategy brief

The objective of a put option's opposite long diagonal bull call spread is to simultaneously profit from the loss of time in recent months and the rise in asset prices in the past month.

Ideally, after an investor's position opening strategy, the price of the underlying asset fluctuates smoothly until the option expires in recent months and becomes an illusory option.

After the recent month's options expired, the strategy left only long positions with long-month put options. If the underlying asset starts to drop sharply at this point, investors can profit twice.

In this strategy, under normal circumstances, the price of a recent month put option with a high execution price is theoretically less than the price of a long-month put option with a lower exercise price, so the capital was in an outflow state at the beginning of the strategy's establishment.

After the recent month's options expire, you can choose to simultaneously close one-month options or open other options to form a new option strategy according to different market conditions.

Furthermore, when other conditions are equal, the size of the price difference between the two exercise prices, the length of the date difference, and volatility together determine the size of potential profits and losses.

Overall, this is an advanced strategy that requires comprehensive dynamic consideration of the three dimensions of direction, time value, and volatility, and is not suitable for novice options users.

Risks and benefits

Maximum benefit: Limited. Maximum profit is achieved if the stock price is equal to the recent month's exercise price on the maturity date of the recent month. This is a dynamic value, which depends on the dynamic value of the long-month option at this time, and this price is affected by volatility and cannot be confirmed in advance.

Maximum loss: The option premium spent.

Break-even point: only one. It is located between the two exercise prices. It is also a dynamic value, determined by the price of the long-month option when it expires in the recent month.

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.

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