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Calendar & Diagonal Spreads
[This article is for a beta feature. Please note that changes might occur]


Calendar & diagonal spreads are spreads where we buy options in one expiration and sell options in other expiration.
The most common use-case is to use the high time decay of the closer expiration to increase our trading edge and make the bought option cheaper.

A calendar spread is a specific case where we buy the same strike options but on different expiration dates. We sell the closer expiration and buy the furthering expiration. The closer expiration is called the front-month option, and the further expiration is called the back-month option.

Diagonal spreads are a bit more complex where we can choose any strike and any expiration to buy and sell. This makes diagonal spreads a very powerful strategy but more suitable for advanced traders.
If you want to start trading diagonal spreads, a good way to do that is to think of them as regular spreads, but the sold leg would be a closer expiration to increase the time decay.

Option samurai creates all possible combinations for the entire optionable universe and shows you the best trades. Since there can be hundreds of millions of combinations, it is essential to filter them and sort the results according to what we are looking for.

This article will give some overview and tips on how to utilize this advanced and unique feature best.


How to build

In both calendar and diagonal spreads, the sold option would be front-month to increase the time decay. The long option would be a further expiration (the back month). The chosen strikes and expiration dates change according to market prices and your outlook.


Tip: you can click on any row in the table to see the analyze tab and all the trade details: Options strikes and expiration, cost of each leg, IV, OI of each leg, and total cost. You can also see the P&L chart for different stock prices.




Special data points:

  • IV Ratio - Calculated as: [Front-month-IV] / [Back-month-IV]. It is designed to compare IV of both options. A value greater than one means the sold option has a higher IV, and a ratio smaller than 1 means the bought option has the higher IV.
  • Coverage Ratio - Calculated as: [Front-month-option-price] / [Back-month-option-price]. It is designed to show how much of the bought option price the sold option 'cover.' Note: option price is the full price (not just time value).
  • Expiration date Difference - The number of days between the sold option's expiration and the bought option's expiration.
  • Theta Ratio - Calculated as: [Front-month-Theta] / [Back-month-Theta]. It is designed to compare the Theta (daily time decay) of both options.
  • Strike difference - Calculated as: [Front-month-strike] - [Back-month-strike]. It is a filter to control the distance between the strike in diagonal spreads. The most common use case is to use above or below 0, thus controlling the outlook of the spread.
  • Shape of the diagonal spread - The diagonal spread's 'shape' refers to how it 'looks like' on the P/L chart. The filter allows us to control if the profit and loss of the spread at both extremes. If we pick riskless up, we have a spread that can't lose at the extreme rise of the underlying asset, and if we pick riskless down, then the spread can't lose at the extreme decrease of the underlying asset.


Tip: All the other spreads filters, such as the probability of profit/loss, break-even points, deltas, etc., are also available for calendars and diagonals. This will help us find the best spreads for our market outlook.


Sample Usecases:

Find Spreads with the highest IV difference - Since calendar/diagonal spreads can offer more flexibility, we can scan the entire chain and find the options with the best IV ratio. This means we can sell the option with the richest volatility and buy the cheapest option with the lowest volatility, as long as it fits our other criteria, such as maximum loss probability of profit, etc.

Find options with the highest coverage ratio - Spreads with the highest coverage ratio are spreads with a sold option that covers the most out of the bought option price (which has more time before expiration - hence lower time decay). This means that we buy our option at a lower price, even for credit. The downside of this strategy is that if we have a strong move before the short leg's expiration date, we will need to manage the trade (roll or lose early).

Increase the probability of a credit spread - A regular credit spread sells one option and buys another option for the same expiration but further from the money as protection. This means that we keep some of the premium we got and have a limited loss because of the protection. Instead of buying a protective leg at the same expiration, we can buy a protective leg at a further expiration. This will probably lead to a small debit (or an insignificant credit). In return, we will increase our probability of profit and the 'profit zone' of the trade, as the sold option will decay faster.


Read more:

More use cases: [Coming Soon]
More unique features: Knowledge base article
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