STO TLT Dia Feb19 124 BTO Jan15 119 Puts for 3.75 Crd. Max risk is $125 Max profit is $375
I placed this position this morning and Jeff asked me if I could explain what I did for the benefit of everyone.
Here it goes:
This is a reverse Diagonal….
Selling the longer expiration Feb 19 2016 TLT 124 Put and Buying the shorter expiration Jan 15 2016 TLT 119 Put. The total position results in a credit of $3.75 pp. Since this is a $5.00 Horizontal Spread the max cost is 5.00 – 3.75 or $1.25 pp plus commissions.
This is what the MM does when we buy a Diagonal…he/she takes the other side of the trade. The trick is to close it in one trade, and don’t let the short expiration option expire, otherwise you’ll end up with a naked short put.