Beyond FOSO: Diagonal Spreads: A Debit Strategy

Our last blog regarding The Options Accelerator class, which Chris Burgess teaches, covered the first class lesson, which you can review here. I have found a significant difference between covering the introductory classes at Tradesmart University and the more advanced classes like Chris’ Options Accelerator and Alphonso’s Earnings Explosion. The introductory classes, such as our upcoming Foundations of Trading series, are very defined in what and how they present information. At the same time, the teachings in our more advanced classes have fewer PowerPoint slides and more charts as the instructors exhibit their strategies and teachings with real-world examples.

I wrote about what Chris taught in that first class, but what really caught my attention was the .pdf document he provided called: Ultimate Options Strategy Encyclopedia. This strategy guide breaks down a large number of options strategies that an options trader can employ, and it alone is worth the price of admission. Let me provide you with an example from page 41 of the document that covers the debit strategy Diagonal Spreads.

The first part of the page is the bullet points of the Diagonal Spreads, which lists it as a debit strategy that can be bullish or bearish in nature. Next, it shows how many legs the trade has, which is two and whether you can use either calls or puts when deploying this method. Finally, its overall usefulness which Chris rates this strategy as excellent with 5 out of 5 stars.

The second part of the page is the overview where Chris outlines a Diagonal Spreads strategy with the following text: Diagonal Spreads aim to profit from an eventual, but not immediate, move in the underlying security. Where Vertical Spreads have the same expiration but different strikes and Calendar Spreads have the same strikes but different expirations, Diagonal Spreads have different strikes and different expirations. Diagonal Spreads have limited profits and limited losses.

Next is the subsection of when to use it. Here Chris explains that Diagonal Spreads may be a great trading option when you expect the underlying security to move sideways or against you for a period before eventually moving in your desired direction.

Next is the subsection on how to trade it. Here Chris explains for a bullish Diagonal Spread,  you need to buy a longer-dated At The Money or Out of The Money call option and sell a shorter-dated call option with a higher strike price. On the flip side, for a bearish Diagonal Spread, you need to buy a longer-dated At The Money or Out of The Money put option and sell a shorter-dated put option with a lower strike price.

The second column of the page covers a brief trade example, what to look for when taking the Greeks into account when using this strategy, and finally, a breakdown of the Pros and Cons of using a Diagonal Spread. For example, the Pros of this options trade are, it benefits from time decay, it is flexible, it can profit from underlying moving against you in the short term, and finally, it has more upside cushion than Calendar Spread. As for the Cons, this trade can limit your upside if the underlying security immediately moves your direction; it has medium level and medium level margin requirements.

​In Closing

​The Pros and Cons section of this document is perfect for anyone looking to find one or two options strategies to focus on out of the ocean of those that are available. This document will save you time, will save you money, and will help you quickly find the option strategy that is just right for your trading goals. If you like the material reviewed in this blog post, then stay on the lookout for our next blog, which covers one of Chris’ favorite Credit Strategies. Until next time!