Playing options is great from a leverage standpoint, but can you stay in the game long enough to withstand a ‘bad result’? Further, do you take too much risk on your plays, preferring directional moves? Are you willing to accept the results as they come, good or bad? Those questions and more need to be answered if you plan to show some success.
I look at options trading as a journey not a destination. In other words, it’s about the trade and not the result, as I will learn more from the process than the final outcome.
Uncertainty reigns supreme in markets, we are always at a disadvantage because we cannot see the future, and are always one disastrous result away from being put down. But, that doesn’t have to be the case all the time. We can take a directional bet based on our analysis and cut risk down substantially using different option strategies.
CALENDAR SPREAD
One of my favorites surround a high volatility event like an earnings announcement is a calendar or diagonal spread. Basically these spreads are timing mechanisms that simultaneously allow you to participate but limit risk.
THE BENEFITS
Further, a calendar/diagonal spread bought (debit) if done correctly can be turned into a zero-cost vehicle on the long option purchased, hence a ‘free’ trade that can have a potential bonanza at the end of the trade. A diagonal/calendar requires buying a selling similar/same strikes but in different months, hence the timing.
[Editor’s note: Join Lang on March 14 after the close as he extends your education with a free webinar. He’ll teach you about different option strategies, this time about Calendar/Diagonal spreads mentioned in the article. Seats are limited, so make sure you sign up to attend.]
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