A ‘diagonal put spread’ is when puts are bought and sold on the same security, and both the strike price and expiration date are different on the two legs.
E.g., buy a 9 month put on QQQ at 135, and sell a 3 month put on QQQ at 145. In the strategy analyzed this month, another 3 month put on QQQ is sold when the first 3 month put expires, and a third 3 month put on QQQ is sold when the second 3 month put expires. In this way, the long put protects against arbitrarily large losses when the market drops (though money is lost when the market drops), and profit is made off of selling put option premium.
Take a look at my analysis of how QQQ diagonal put spreads have worked out over the past 10 years. I’d especially like to hear from anyone who has been using this strategy on non-index options.
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