Some traders may use the SPX short Call Diagonal simply as a way to collect premium and focus less on the potential directional implications of that trade. That isn’t the way that I trade them because I have certain directional expectations based on chart setups. On the chart (below) I show 2 setups. There are a large number of chart analysis and price action posts on this blog, read them if you don’t understand the setup shown. The trade(s) made based on the 2 setups happen on the candle following candle #1 and #2. Here’s a recent SPX chart showing 2 scenarios; #1 where my trade of choice would be a wider short Call Diagonal bought for a relatively large credit and #2 where I would trade that chart setup using an OTM (out of the money) Call Calendar paying around $1 debit.
Staying with that chart analysis, could I have also traded the setup at #1 with an OTM Put debit Calendar? Yes! Could I have made both trades, buying a wider short Call Diagonal for a relatively large credit and buying an OTM Put Calendar for a relatively small debit? Yes! Would I use the high of #1 as the hard stop on either or both of those trades? YES! If the directional expectation is based on a chart setup and that setup fails I’m out of the trade.
Below are a few links to other posts that I’ve made recently regarding SPX short Call Diagonals. A final word of caution. I NEVER trade short Call Diagonals on stocks or ETF’s that have experienced a 5%+ 1-day move up or down in the past. That list would include almost ALL stocks. Also, I NEVER trade short Put Diagonals. Those are my rules and I never break them! Well…almost never. 😉
Links:
The Short Call Diagonal / The Rolling Calendar Spread / The Layering-On Risk Position
Call Calendar vs. Short Call Diagonal / The Risk Profile Lie
2/16 Update: See risk profile and most recent option chain below. The risk profile shows 1 (of many different) potential ways of structuring a SPX short Call Diagonal/ Calendar position. If SPX was at potential good location for a bullish trade I could add more Calendars or reduce the size or even exit the short Diagonal. Don’t forget that closing/exiting a trade is always a good potential solution! Many traders keep sizing-up to hedge a position and end up with a large loss. Always consider downsizing first!
Questions and comments are welcome. Leave them down below.