QQQ Diagonal Put Spreads

A diagonal put spread is to buy a put option, and also sell a put option with a different strike price and expiration date, but the same underlying security.  E.g., buy a 9 month QQQ put that’s 5% out of the money, and sell a 3 month QQQ put that’s 1% in the money.  This strategy tries to make money by collecting the put option premium.

Specifically, the idea is that for each 9 month put option bought, 3 3-month put options are sold.  I’ll give an example to clarify.

In March, buy a 9 month put on QQQ that’s 5% out of the money.  At the same time, sell a 3 month put on QQQ that’s 1% in the money.  In June, when the previous 3 month put option expires, sell another 3 month put on QQQ that’s 1% in the money.  In September, when the previous 3 month put option expires, sell another 3 month put on QQQ that’s 1% in the money.

The same thing can also be done starting in June.  I.e., in June buy a 9 month put on QQQ that’s 5% out of the month, and sell a 3 month put on QQQ that’s 1% in the money in each of June, September, and December.

Of course, the same thing can also be done starting in September and December.

Since this strategy is working with 9 month long puts, which are purchased every 3 months, at any given time this strategy has 3 long put options, and 3 short put options.

In the table below I’ve given the return from implementing this strategy from 2006 – 2014.

The return column represents the return as a percentage of the underlying asset on a single transaction.  I’ll give two examples of this.

Suppose that in 2006, QQQ was trading at $100 per share, and each quarter 1 9-month option was purchased (1 option = 100 shares = $10,000) and 3 3-month options were sold.  The return for 2006 shown in the table is +11.7%, so this means the profit over the course of the year was 11.7% of $10,000 or $1,170.

Similarly, suppose that in 2007, QQQ was trading at $100 per share, and each quarter 1 9-month option was purchased and 3 3-month options were sold.  The return for 2007 shown in the table is -9.4%, so this means the loss over the course of the year was 9.4% of $10,000 or -$940.

If you’d like to think of the return in terms of all of the long put options instead of just 1 long put option, you can divide the returns in the table by 3 (since at any given time there are 3 long put options open).

With that out of the way, here is the table showing the return each year:

YearReturn
2006+11.7%
2007-9.4%
2008-5.0%
2009+35.4%
2010+23.4%
2011+8.1%
2012-3.5%
2013+27.0%
2014+21.0%

The purpose of the long put in this strategy is to cap losses.  You can see that in 2007, and especially in 2008, the long put in this strategy served that purpose, but there was still an annual loss.

This is an analysis of past performance, but past performance is not a guarantee of future performance.

Comments / Questions: joseph AT StockMarketMovement.com