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Diagonal Put
oscillateDiagonal Put is a Horizontal Spread. The aim is to create a net credit trade by buying the longer term OTM put options and selling the ITM put options while creating the same risk profile as a Diagonal Call Spread
Example:
| Instrument | Qty | Price |
|---|---|---|
| SELL NIFTY 21-Jul-26 24150 PE | 65 | 161.6 |
| BUY NIFTY 28-Jul-26 24050 PE | 65 | 189.4 |
When To Execute?
Diagonal Put needs to be executed when we expect stock/index to be range bound or bullish for long period. identifying clear area of support is important. When the stock closes above higher strike Put then near expiry short Put expires worthless while long expiry OTM Put falls in price.
Trade
Buy long term lower strike Put and sell nearby higher strike Put.
Advantages
Generate monthly income
Can profit from range bound stocks and make a higher yield than with a Covered Call or Naked Put
Disadvantages
Capped upside if the stock rises
Can lose more than initial outflow on the downside also can lose on upside if the stock rises significantly
High yield does not necessarily mean a profitable or high probability profitable trade.
Maximum Profit
Maximum reward is Value of long put option on expiration of short put
Maximum Loss
Maximum risk on the trade is Higher strike - value of long put at the time of first expiration-(net credit received or net debit paid if any)