If you're going to do diagonals without potentially taking it up the glory hole if price rips away from the setup, well, this is the way to do that. Unlike naked shorts or short verticals, diagonals benefit from volatility expansion, which makes them one of the go-to strategies in this low vol environment we're experiencing.
To get into this setup, you sell the front month short at the 20 or 30 delta (depending on your risk appetite; closer to current price means lower POP% for the short option, but higher credit brought in at the door for that option).
You simultaneously buy the back month long for a debit slightly less than what you were paid for the short option, receiving a small net credit for the whole setup. If price rips away from the diagonal (in which case both the long and short go to worthless), you haven't earned much, but you're also not losing what you would pay in debit for a tighter diagonal where the debit you paid for the back month exceeds what you received for the front.
I like to use an expiry that is at least two months out from my front month option so that I have an opportunity to roll my front month short at least twice (in the example, from April to May and then May to June), but you can certainly set these up for shorter duration and then, for example, roll from a weekly to a weekly instead.
This particular setup, however, doesn't come cheap; the spread is 24 wide and comes with a $2400 BPE price tag. Of course, you can piddle with the back month long option; bringing it in closer in time will allow you to narrow the spread while still being paid a net credit for the setup.* Similarly, bringing in the short option closer to current price (e.g., the 30 delta; I wouldn't go in closer than that) will allow you to bring in more credit for the short option and bring in the long option closer to current price.** Alternatively, you can use a smaller, broad market instrument like IWM ... .
Notes: Because this setup has downside risk, it may be advisable to also get into a call side diagonal using the same back and front months.
* -- The April 21st 230 short put/May 19th 220 long put diagonal (a 10-wide). (.04 net credit/contract). The downside to this is that you only get one opportunity to roll -- from April to May.
** -- The April 21st 233 short put/June 16th 217 long put diagonal (a 16-wide), where the April 21st 233 is at the 30 delta. (.04 net credit/contract).
To get into this setup, you sell the front month short at the 20 or 30 delta (depending on your risk appetite; closer to current price means lower POP% for the short option, but higher credit brought in at the door for that option).
You simultaneously buy the back month long for a debit slightly less than what you were paid for the short option, receiving a small net credit for the whole setup. If price rips away from the diagonal (in which case both the long and short go to worthless), you haven't earned much, but you're also not losing what you would pay in debit for a tighter diagonal where the debit you paid for the back month exceeds what you received for the front.
I like to use an expiry that is at least two months out from my front month option so that I have an opportunity to roll my front month short at least twice (in the example, from April to May and then May to June), but you can certainly set these up for shorter duration and then, for example, roll from a weekly to a weekly instead.
This particular setup, however, doesn't come cheap; the spread is 24 wide and comes with a $2400 BPE price tag. Of course, you can piddle with the back month long option; bringing it in closer in time will allow you to narrow the spread while still being paid a net credit for the setup.* Similarly, bringing in the short option closer to current price (e.g., the 30 delta; I wouldn't go in closer than that) will allow you to bring in more credit for the short option and bring in the long option closer to current price.** Alternatively, you can use a smaller, broad market instrument like IWM ... .
Notes: Because this setup has downside risk, it may be advisable to also get into a call side diagonal using the same back and front months.
* -- The April 21st 230 short put/May 19th 220 long put diagonal (a 10-wide). (.04 net credit/contract). The downside to this is that you only get one opportunity to roll -- from April to May.
** -- The April 21st 233 short put/June 16th 217 long put diagonal (a 16-wide), where the April 21st 233 is at the 30 delta. (.04 net credit/contract).