Weekly Options: Double Diagonal Options Strategy to Set Up A Potentially Risk Free Earnings Play
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- Опубліковано 19 чер 2024
- Weekly options can be used to create a surprising amount of cash flow if you employ the double diagonal strategy leading up to earnings. In this video we show you an example of using weekly options in CMG to create a potentially risk free trade as CMG heads into its quarterly earnings release. Register for our free intensive trading webinar smbu.com/seth
#WeeklyOptions #DoubleDiagonal #OptionsTrading
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Love this strategy. Thank you.
Hi Seth! Thanks for the great presentation. Can you please share what criteria you are using to choose what stock is good to use such kind of strategy? Are you checking volatility both stock and option? What about the price trend?
If you have to explain how the basics of options work then those people probably shouldn't be trading these strategies until they have a better grasp on options.
No one should trade any options strategies without a great deal of study, backtesting, paper trading and very very small live trading for an extended period of time.
Cheers for this, I been tryin to find out about "how to adjust option long call" for a while now, and I think this has helped. Have you heard people talk about - Winoorfa Option Olegroson - (just google it ) ? Ive heard some awesome things about it and my cousin got excellent results with it.
@SFP yeah on an intro options strategy. This is an advanced option strategy so why the fuck is he explaining how options work? If we are watching this video we better already know what this is.
Glad to see someone talking about this
Hi, very helpful, is there any disadvantage in this strategy of using calendar spreads instead of diagonals?
When looking for these, you need to make sure the earnings date is confirmed so you are placing the longs in the right place.
Great presentation, thanks for sharing! How would you fight this trade if the stock price starts moving past the strikes that are short before earnings week?
How do you determine your long expiration date? Is it always around earnings or do you push it out further?
One of my all-time favorites!
Thanks David!
@@smbcapital I would love to see something about how you would manage this trade if the underlying started to really get out of range.
@@dek2000utube , yes, that is the main skill required for this type of trade and I doubt if we'll get to see a video on managing that situation.
Your videos are crystal clear.Thank you so much for sharing the knowledge.
The risk in the middle of the trade occurs when the underlying is OUTSIDE the short strikes (the further OUTSIDE the short strikes the greater the roll collection value collapses AND the stock does NOT return to a well enough centered location the day before earnings.
Yep, I wish videos like these also show the risks. They're misleading in that the trade seems like a surefire winner.
But if CMG was to go above 850 or below 780 in the 4 weeks leading up to earnings (this is quite likely as the stock only needs to move around 5%), then the trade is a loser.
@@desisher5292 But if it goes above 855 then it wins on the bought call so there is some protection there. If it were to move outside the sold call and put, couldn't you just readjust the next weeks calls and puts accordingly?
good stuff. despite the constant plug. this also only works with high priced (500+) stocks. and the most interesting part would be what would happen if the price gets close to those sold weeklies, how to adjust exactly? when to bail out?
I like the strategy presented but I had to watch the video a few times and pausing to understand it. It would help if you present and actual option chain with the buys and sells . Slides look a little busy if someone is new to this. Good video. Thank you.
Love it!
wow -sounds pretty impressive. am thinking of scenarios where it may not work and yield profit. I suppose if the stock shoots up or goes down well before ER, the strategy could result in a loss - right?
Hey guys, great content! Do you think you could do a video on how your best traders prepare for the upcoming week? (Ie what stocks do they choose to rip through, how they determine them, etc.). Thanks!!
Thanks for the suggestion!
The optimum result of this trade occurs when the underlying stock is very close to or at ONE of the short strikes at the time of EACH WEEKLY roll and then move almost exactly in between the strikes the day before the earnings are released.
One more question, what if price breached the one of the short strikes in the 1st or 2 weeks how do you manage the trade?
You roll the untested side up.
Hi everyone! I like this strategy. I have a few rogue stocks that are having me scratch my head. AMT and W went well past
my short strikes AND long strikes. Do i roll the shorts to the next week expiration that gives me a credit equal to the debit i have because of these outlier moves?
If these are ITM on the long strikes, you can keep doing this strategy except now your short options should be OTM (still short duration). At this point you now have a Poor Man's Covered Call and a Poor Man's Covered Put.
If you dont like that I would take my winnings and start a new trade.
If I set the Feb 7th Long Strangle at the expected move I would be at 770/900in $CMG, If I sell the Jan 10th 775/895 strangle the combined result would be a roughly $2100 debit PLUS the $500 Diagonal BPR for total trade risk of 2600
Good thoughts
so we are cash flowing weekly into a future iron condor the week on or after earnings. benefitting from the price increases with IV and earnings. I like, i think its important to have your strikes wide as possilbe when setting the long options to give you a good buffer and room for the stock to bounce between
Believe it or not, the collection along the way is bigger if the underlying stock is NOT well centered at each roll.
What calculation led you to choose the initial number of days to expiration?
In this case, it looks like he is using the earnings release as the pivotal date for the long strangle.
Are you buying/selling at the same time or legging in for a better price. If buying at the same time, what’s the benefit?
Last question, why not close the long call and long put right before earnings is released since IV is so high? Seems like it would manage risk better.
My guess is that he was comfortable with the risk that allowed him the possibility of over 1500 in profit. Had he closed his long options before earnings, he would have locked in around 1300 and some in profit, but had no chance of the greater reward that he achieved by letting the options ride through earnings.
Seth, thanks for great video and explanation. My only question is why you sold last short strangle into after the earnings taking a risk where CMG may have gone through the short and long calls causing 5 point loss instead of selling your long strangle and closing position before earnings?
im interested in the answer. Very good question. I hope Seth will answer this
He could have but I think he his trying to prove that if you actually sold on expiration day of what would happen. There are a bunch of ways to play an ER. He was keeping it simple. Just like he really didn't have to buy the options back every week to close them. They would expire OTM any way. He has a system and trying to teach it simple. Hope that helps guys.
At the Jan 17th expiration with moments to go before the closing bell, rolling the 46/48 strangle from Jan 17th to Jan 24th earnings 12 cents this collection was GREATLY reduced due to stock.being 1.02 above the call of the strangle being rolled.
One strategy to actively manage next week's roll is to monitor the stock for the touching of the strike, a roll has its maximum value when the option is ATM, when touched roll the touched option.
I have another trade to do. It is $CSCO, which had earnings on Feb 12th, so the initial long cycle will be the Feb 14th cycle, on Jan 10th close the expected move was 2.75, taking into account a slower than usual amount of decay due a floor being put in the earnings expected move I'm estimating the expected move to be 2.00 on Feb 12th, so I'm going to build a long strangle 3 OTM on each side to serve at will be wings.
For this trade to truly be a risk-free trade the cash flow MUST be POSITIVE by greater than the width of the diagonal when rolled into the Iron Condor (in the original long cycle )
This trade came within 38 cents of being risk free but $CSCO stayed between shorts after earnings.
How does someone clep past your training to be considered for trading with SMB?
Peak roll collection occurs when the stock is pinning one or other of the strikes involved in the roll.
Curious, thoughts on this trade..
Buy 100 SHOP
Sell 1 600 Call Jan/22
Sell 1 520 Call Jan/22
Break even at 848 or 270.
The view would be at some point next year an event will drop the share price by 20 percent, cover the calls and keep the shares. Downside protection in 2020 to 290, Upside Risk begins at 720.
Just thinking about buying shares but believe it’s hard to justify the stock doubling in what will likely be some turbulence ahead in either mid or late 2020 or 2021 in the overall market which I would think high growth would get hit significantly.
Thoughts?
P.S. I’m not a professional trader, my concern on the trade would be getting out of the calls if an earnings release blew all doors off the car. Not sure how liquid those LEAP options would provide.
The roll to be made during the week of Jan 17th of the short strangle from Jan 17th through 24th went out at a 26 cent credit, we are looking for this value to increase during the week.
On Feb 13th at 1:15, the day after the earnings report comes out. $CSCO settled between the short strikes and you could buy back ONLY the shorts for 14 cents, locking down a triple digit ptofit
With the 12 cent collection (10 if you deduct $2 commission) the new debit of the Jan 24/Feb 14 44/46/48/50 Double Diagonal stands at net 58 cents after commissions.
What is the name of the site you are working on during the explanation?
The cost of the Feb 14th 44/50 strangle (halfway between mid and natural) is 88 cents (plus $2 commission) makes 90
Thanks Seth! But I am sure there are scenarios losing money in this trade. Could you please explain those too? What if CMG breaks the range before the final week short position?
One of the ways the trade can go South is if the stocks moves OUTSIDE the short strikes at the time of the roll, the further away from the short strikes it is, the LOWER the collection will be at the roll date. If too many of these WEAK collections occur during the life of trade you will be a position where you would have locked in a losing trade NO MATTER where the stock ends because you did NOT COLLECT enough.
On Jan 10rh close, Selling the Jan 17th 46/48 strangle collect 24 cents (less $2 commission) net $22 So for next week the cost basis of the trade is now $68 debit (there is also a $200 BPR that your broker will required due to calendarized credit spread created)
Now in the $CSCO example it was 1 day till it is time to roll the trade and the thing that would harm the trade HAS occurred in this example $CSCO
why doesn't he address the max LOSS and what scenario would cause the max LOSS?
Because he wants to sell a training product/subscription service and wants to make it look like profiting from options is easy if you follow his advice. Of course he's not going to point out that there is a big risk of loss if CMG moves above 850 or below 780.
Which brings the collection to a 1.62 credit after commission on what is now a Feb 14th $CSCO 44/46/48/50 two dollar wide Iron Condor now with 38 risk for 162 potential
Is this short iron condor?
How does volatility play into this strategy.
If the stock price trends higher or lower over those weeks, should you re-center the sold strangle strikes and possibly the long strangle? You wouldn't sell the final week iron condor if it's in-the-money, would you?
They CAN but it obviously is a highly directional trade at that point.
If you recenter at each roll you are probably reducing your collection and could be doing so at a debit.
Hi Seth! Really enjoy your webinars. I tried my hand at this strategy on AMZN. At the time i placed the trade the earnings where announced for Jan 23rd. I bought a JAN 24th expir. strangle and sold the weekly strangle as the strategy commands. A few days after placing the trade the earnings' date was changed to JAN 30Th!!! I got wacked. Volatility crushed. Now the stock is doing nothing so no premium on the weeklies. Anyone know how i could turn this around? TIA!!
Roll it into a different expiry same strike price and continue.
Is shorting a double diagonal not optimal for earnings? Entry 2 days before and exit 2 days after earnings. You profit off large price moves and IV crush?
At 9:58 AM on Jan 31st. rolled the Jan 31st 46/48 strangle to the Feb 7th 46/48 strangle for 46 cents (44 after commission) this moves the cost basis to a TWO cent CREDIT heading into the final roll next week.
How about buying calls and puts ITM. This way the Long strangle will always be at least worth the difference in the strike of the calls and the puts.
Also be aware that the broker will impose a additional buying power requirement on top of the initial debit that is equal to the width of the diagonal spread if each diagonal is a different width the greater of the two. #DoubleDiagonal
Is someone drinking mouthwash in the background?
Now I'm going to sell the Jan 17th SHORT strangle 1 OTM (46/48) creating the initial double diagonal
I’ve watched several SMB videos and have yet to find a strategy I can use.
I don't think that's SMB's issue. What other factors are you considering when trading options? Bid/Ask spread, liquidity, IV percentile, and technicals are what I use to determine which stocks to trade and which strikes to choose. I always choose expirations that are at least 3-4 weeks out.. although most trades I make are 45-55 DTE. Most of the time I take profits when I have captured 50% of the total credit and set a loss that is 1.5x the total credit potential.
This is actually a very effective strategy.
@@chrisnickles9498 Sounds like u are a Tasty Trade and/or Theo Trade student. :)
Theo Paine yes absolutely a tasty trade student.
@@TraderDT Agreed. While I use Tastyrade for education, I have learned quite a bit from these videos. Especially the Broken Wing Butterflies. This strategy illustrates the power and flexibility of diagonals.
These are not Poor Mans Covered Calls/Puts. They are interesting when thought of as 2 strangles as opposed to 2 diagonals. We are essentially financing a wide long strangle by selling several shorter term strangles.
It all has to do with how the Greeks are being manipulated.
$CMG is now estimated to have earnings on Feb 4th, which corresponds with the brand new this week Feb 7th cycle, what deltas do you use to set the long strangle part, AND do you start this as early as NEXT week by selling the Jan 3rd cycle strangle and what deltas do you use then if you start next week?
In the video Seth mentioned that $CMG was trading in a range between 850 and 780, which was how they chose the long strikes. Many options traders sell strangles at the .16 delta on each side. 68% chance (or one standard deviation) of those options expiring OTM.
$CSCO has moved a FULL dollar above the call strike at the time that is was at the short strike on Wednesday the roll to Jan 24 could have been done for 28 cent. Now because it moved to 59, the amount to be collected on the roll as fallen to 14 cents AND to go with it there is a HIGH LIKELIHOOD that the 58 call for Jan 17th would be assigned tonight, which would require it to be reversed in the morning.
I use a system that has never been mentioned here that has a time tested criteria. Livermore called it the pivot point of a stock. Shaffers redefines this using an overhead of people selling calls to add credibility to Livermore in today’s environment.
I see you mentioned that you buy back the out of money expiring weekly option 5 hours before it expires. Would it be better to just let them expire worthless, no buy back cost or transaction fee
That's a risk/reward decision Wilson, but most of the time it makes more sense to roll them.
If you sell the next weekly call and put option without closing the current one, your broker will require margin for naked options.
You can play it any way you want, but doing it the way you propose, you're deferring the income from the sale through the weekend. So you pick up a few pennies letting them expire, and your income goes down quite a bit for not having rolled them on Friday and losing the time value of the weekend. Also, if you sell the following week's options prior to current week's expiration, your broker will want margins reflecting the sale of naked options.
isnt double diagonal is same as iron condor with the bought calls/puts being more far out...?
in the end its like an iron condor bnut being put together at different times makes it play differently although im not suire on details at this moment.
Nope! With an Iron Condor, all 4 legs are in the 'same' expiration period. WIth DD
s. u sell the front month & buy in the next month (or later exp cycle).
@@TraderDT LETS GOOOO!!!!!!!!!!!!!!!!!!!!
Curious as to why you would buy the options back instead of letting them expire worthless? This is one aspect of selling options I don't quite grasp.
Will, when the value of the short is worth so little, the opportunity cost of not closing it cheap and re-opening another short option with much more premium is just not worth it in most cases. So you pay to close the first one to get into the second short more quickly.
I don't understand why you don't just place the final week short strangle?
On Jan 24th, rolled to Jan 31st for 16 cent credit
Wouldn't a Double Calendar work just as well as a Double Diagonal (for Pre-Earnings Play), plus it's cheaper too? Your thoughts.
Theo Paine those are the same thing.
Double diag = Double calendar
You will collect more money on these weekly short options if you sell a diagonal rather than a calendar. You can do calendars but you likely won't make as much money on the trade.
So Sweet!
Thank you for this strategy!
I never thought about it like this
what a cool way to end up with an iron condor! =]
LETS GOOO!!!!!!!!!!!!!!!!!!!!!!!
Fellow cult member lol always pumped!!! Let's go!!!!
@@informedtradez You know it!~
Train and trade well!
and stay hyped!
LETS GOOOO!!!!!!!!!!!!!!!!
If you waited till 3:55, the roll would have been 70 cents after commission
You need a deep pocket and nerves of steel to hold some of these and kick them down the road till they work out. I guess a different mid set is a big factor.
At 3:10 PM EST, you can make the final roll into the Iron Condor for 1.60 credit after commissions
With only 5 hours of trading left, why not just let the options expire worthless ?
You can still put on next week's trade in a large margin account.
Happen to me the short call become ITM on 3.45 pm on expiration day after crazy last minute rally. glad the broker auto close it for me. After that i am thankful for that and I NEVER ever trust it to let it expire again ever. close it or roll it when you hit your profit target. turning winner to huge loser on expiration day or last hour is very demoralizing experience.
Ok, the strategy was begun with the cycles 28 days apart and roll EACH week AND including the earnings week.
148 to be precise
Now net debit is 42 cents
I suggest that you use a real platform like TOS or any other to explain this. Another thing you need to show is what happen if the price goes against you. You need to cover the permutations of this strategy to show it really works in worst scenarios.
@YoAzzIsGrass
LETS GOOOOOOOOOOOO!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
lol glad you enjoyed it Daniel.
Long Strangle. 4203-
Open Short Strangle 553
Roll to Oct 4. 373
Roll to Oct 11. 477
Roll to Oct 18. 724
Roll to Oct 25 3385
Total Short Credits. 5512
Unless I messed something up.
It looks like you would’ve made a ton more in premium had you avoided buying the long strangle to begin with. That was a waste of money. You could’ve just stayed with the short strangles.
wouldn't IC strategy play similar results?
yes but since the bought options were bought such a long time ago its not just an iron condor.
it will still have profit if the earnings release blasts off i believe!
LETS GOOOOOO!!!!!!!!!
I thinks the results are different between them , tho they both are range bound strategies. With an IC,, it's vega short; u want volatility to collapse. IC is a great strategy to play earnings due to volatility crush once earnings comes out. WIth DD, it's 'long' vega. U profit when volatility increases - which is the opposite of ICs.
I am new to options. This one lost me.
Too complex.\