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Long Diagonals. Better rewards and lower risks while Requiring Directional Movement. The Haley Diagonal is simply a covered call on Steroids. The trade: Is Both a Fundamental AND technical trade Can be played Bullish or Bearish

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long diagonals

Long Diagonals

Better rewards and lower risks while

Requiring Directional Movement

the haley diagonal is simply a covered call on steroids
The Haley Diagonal is simply a covered call on Steroids

The trade:

  • Is Both a Fundamental AND technical trade
  • Can be played Bullish or Bearish
    • Requires an Intermediate or Long Term Posture of one or the other
    • Allows for some stocks to be bullish while others are bearish
    • ETFs can work, rewards and risks are lower
  • Using options for the long component decreases the cost and / or increases the leverage.
  • Rolling the shorts leverages technical moves.
  • Rolling the long provides capital growth while decreasing the risk if direction reverses.
definition of success
Definition of Success
  • Follow investing Plan
  • Protect and preserve capital
  • 60-70% of trades are winners
  • Make a minimum ROI of 50% per trade – Losses under -10% ROI
  • Plan Income vs. Capital Gain (trade 1 month vs. several months) and manage accordingly
watch list criteria
Watch List Criteria
  • Bearish
    • Stocks already in a bear watchlist
    • Market Posture Bearish or neutral – for anticipated length of trade
    • Poor Fundamentals, industry group under 40, ACC/ DIST < 40, downtrend on 30 DMA
  • Bullish
    • standard InvesTools Bull stock fundamentals. Phase 1 and 2 scores…
    • Bullish posture on Industry and / or Geography if not a broad ETF
bear entry rules
Bear Entry Rules
  • Stock price expected to continue to trend down or sideways for the duration of the trade
  • Consider legging into the trade. Enter the long side as the Stock price bounces down from resistance and the MACD rolls down. Enter the short side when the price bounces up
  • Confirmation for naked entry is at least two days of trend
  • Enter short as MACD rolls up 2 days in a row, preferably before green arrow appears (this is a bullish signal, because your short is to protect your bear trade in a bullish swing)
long option it market matrix
Long Option – IT Market Matrix
  • First buy the long option deep ITM, with delta -0.71 to -0.73 for Puts, or.73 -.75 for calls. Use IT deltas such as on the Market Matrix– DO NOT USE TOS Option chain deltas – they are different and will affect the trade risk VERY GREATLY. The TOS default for “Volatility Strategy” is “Individual Implied Volatility” which should be used for Verticals and close calendars. If you must use TOS, change “Volatility Strategy” in Setup (upper right corner of Monitor Tab) to “Volatility smile approximation.” This will make the Theoretical price calculation in TOS vary greatly from the mid-price calculation of Bid and Ask that most users depend on. In TOS you can not have theoretical price and deep ITM deltas both correct at the same time.
  • Buy the long option 3-4 months out. In a Bear market, make sure that if the trade is entered near earnings, the expiration of the long option has the same relationship to earnings.  This helps manage the Vega risk.
long option tos individual implied volatility
Long Option – TOS Individual Implied Volatility
  • First buy the long option deep ITM, with delta -0.7 to -0.75 for Puts, or .69 - .72 for calls. These are the numbers I used in a short (4 month, 100 trades (long count)) experiment. I used the TOS default “Volatility Strategy,” “Individual Implied Volatility”. There are significant roll differences mentioned later.
  • Buy the long option 3-4 months out. In a Bear market, make sure that if the trade is entered near earnings, the expiration of the long option has the same relationship to earnings.  This helps manage the Vega risk.
the shorts
The Shorts
  • Sell the short side OTM, with delta 0.28-0.32. The short is either the current month or the front month if near term expiry is less than 21 days. The difference between the long and short delta should be around 0.4 at this point.
  • The difference in deltas provide the risk management for avoiding delta inversion where the near term delta exceeds the long term delta and even with the direction right you start to lose money.
  • If you can’t get a short with the right delta, you can pick a higher delta strike and sell fewer of them to keep the ratio similar.
trade management investools calculated delta
Trade ManagementInvesTools calculated Delta
  • Rolling is the key to making a profit in a Diagonal Spread
    • Buy back the short option and sell another at any point if the value is now 20% of what you sold, or 33% if the value drops very rapidly (a day or two) or reaches .10. All these are due to the underlying ticker moving agaisnt your posture. You should also be watching to see if your posture is wrong.
    • Buy back the short option if the delta decreases by 0.2 or more
    • If the short delta goes above .65 or within .15 of your long delta, roll it down. This happens when the ticker is moving in the direction you want, but faster than you might like. You are making money here, do not panic, this is good!
    • If the underlying is moving away from you (against the long), sell another short!
  • If the underlying is trending strongly in your long option’s favor, leave it uncovered until the price bounces – Confirmation of bounce is 2 days change in direction.
  • When selling a new short option, use the same delta calculator you used to enter the trade and review the delta of the long option. Make sure the new short is about 0.4 from the delta of the long option
  • Roll the long closer to ATM when the delta gets to ~-.95 (Bearish) or .95 (Bullish). If the trend looks to be continuing, roll out to the next expiry that has the same relationship to earnings. Select a new strike with a delta of approximately -.73 -- -.75. You will either get several months additional time for no cost, or additional contracts for no cost, either way allowing more shorts to be sold for the duration.
exits
Exits
  • Monitor position daily
  • Exit if trend definitely reverses (e.g. breakout with volume after news, etc), broken support / resistance, etc
  • Losing trade may be exited early when the spread has lost 50% amount of its opening value - discretionary.  If confident of direction, consider “rolling” with the punch and selling shorts closer to new ATM value – potentially all the way to a calendar
  • In the last month before expiration of the long option, consider the final exit. Aim to exit at least 2 weeks before expiration to avoid maximum theta decay on the long side. The final trade may be a vertical, or just sell the long option
  • If the trend is continuing, roll long out.
money management
Money Management
  • Re-enter short position as frequently as possible to generate highest possible returns
  • Position-size for a debit trade. E.g. if 1% total portfolio risk is acceptable, enter the trade calculating a 50% max loss to be no more than 1% of the total portfolio – for $100,000, this would be a $1,000 max loss.
  • Final profit is calculated by adding the final credit for the long option to all of the net credits from selling the short options, then subtracting the entry purchase price of the long option.
slide18

I had to manipulate prices a bit to represent what I actually traded, Thankback was reasonably close on most

ROI is 583%

Over 6 months

Including commissions

But not taxes.

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