Investment Type:Debit
Strike Prices: OTM for sold leg, ITM for bought leg
Expiration Month: current month for sold leg, later month for bought leg
Composition: Buy deep-ITM Put later month + Sell Put current month

 
  Diagonal Put Profile Chart  
 

 
Description:

 

Diagonal Put is a slight variation of Calendar Put. This strategy is more practical in a sense that we still make profit even if the stock price plunges very fast. With Diagonal Put, the strike prices between bought leg and sold leg is different. Bought leg should be (deep) ITM Puts while sold leg is OTM Puts.

 

This strategy is suitable for traders who have a mid to long term bearish outlook toward certain stocks. They can buy longer term near the money Put and sell (far) OTM Put every month for extra income/profit. This will lower the breakeven point and can pay for the cost of the Buy Put.

 
  Example  
 

 

Entry:


Maximum Initial Investment = $5,000 (or based on 5% money management rule)

Stock Price :
$34.00
   
Buy/Sell :
Sell
    
Strike Price :
32.5 Put
 } Premium: $0.60
Expiration Date :
December
No of Contracts :
25
    

 

Stock Price :
$34.00
   
Buy/Sell :
Buy
    
Strike Price :
35 Put
 } Premium: $2.40
Expiration Date :
January
No of Contracts :
25
    

 

Investment @ Entry = (Premium of Sold Leg x No of Contracts x 100 Shares) + (Premium of Bought Leg x No of Contracts x 100 Shares) = ($1,500) + $6,000 = $4,500


Breakeven Point = Variable

 

Exit:

 

Best Case Scenario:

Stock Price :
 $32.50 down $1.50
    
Buy/Sell :
Sell
    
Strike Price :
32.5 Put
 } Premium: $0.00
Expiration Date :
December

 

Stock Price :
 $32.50 down $1.50
    
Buy/Sell :
Buy
    
Strike Price :
35 Put
 } Premium: $3.00
Expiration Date :
January

 

Profit @ Exit = (Premium of Sold Leg x No of Contracts x 100 Shares) + (Premium of Bought Leg x No of Contracts x 100 Shares) – Investment @ Entry = $ 0 + $ 7,500 - $4,500 = $3,000

 

Return of Investment = Profit @ Exit / Investment @ Entry = 40%

 

Worst Case Scenario : Investment @ Entry