In today’s post, I want to share with you why diagonals are fantastic and great as a retirement strategy.
Let’s go to the paper and take a look.
If you’re trading options and you’re trying to figure out which strategy is good for retirement, I want to share with you the diagonal.
When you look at a diagonal, one of the huge advantages to a diagonal is the positive Vega. Because of that, it gives you a cushion at any time; there’s a pullback.
That’s the first thing. But before we get there, let’s first understand what does a retirement strategy looks like. Or what’s the goal or point of a retirement strategy?
If I’m looking for a retirement strategy, what is it doing? If I bought stock and held it for 50 years, what does that risk profile picture look like?
Well, it looks like this. It’s this a straight line. You might have purchased it somewhere in the 220 area. Well, anytime that stock goes up, let’s say it goes to 240, here you’re profitable.
Here are your profits. All of this is profits. As that stock heads on higher to 235, you are maybe profitable at around $500. If it heads to about 245, you’re profitable around $800-$900.
If it goes down though, let’s say it goes down to 210, now you’re at a loss. You might be down about $400 because everything down here is at a loss. You’re losing money.
What do people usually do in the long term hold situation or retirement?
Well, they hold it forever and collect dividends.They hold forever. Or if things continue to move down or up, they take their profit, or they take their loss and rotate to new stock.
That’s a typical approach. They’re holding forever, and they make money through appreciation or dividends. Or they take their profit and loss. And that’s a general retirement strategy.
When you’re dealing with options, do you have to hold it forever? Well, no. You could rotate every 30 days or 60 days, depending on your length. When you make money from dividends or appreciation in a diagonal strategy, you still make money from appreciation.
But instead of dividends, you make money from Theta, which is usually more because you’re in a shorter-term duration then maybe a stock. That’s because you’re taking the power of options.
If the stock does go against you or the option, in this case, you could still take your loss or your profit and rotate into something new.
In our case, something like this. Doesn’t this have a very similar upward potential move for our retirement strategy – so the same thing.
You make money as the stock goes up or the price goes up. And you lose money as the price goes down. The good thing about this strategy is it cushions you. It cushions you on the pullback, and the power behind this is you can rotate it.
I could rotate this to be a little more powerful or less powerful, depending on how fast that stock ran. If you decided to go into a certain specific stock for 30 or 40 years, you could continue to trade this one day in and day out. But if the stock went up quite a bit, you could make it less scoot or turn it more into a calendar in that case.
I want to share with you here on the screen what this looks like.
Before we do remember that if you want to go check out some more option trading courses, you can find it here.
There you can see a lot of option courses that we have. You can also take a look at our TradersFly website, and there we also have memberships that you can check out.
Check those few items out, and that way, you get even more detailed education.
Let’s get back to the screen.
If I went ahead with buying Caterpillar and analyze the trade, you could see buying 500 shares at about $133 would cost me $66,000 or so.
When you want to do the same type of trade on a diagonal, you could buy a diagonal here. You could do it calls, puts – it doesn’t matter. But here let’s say November is the ones I would buy for protection.
We’ll first start with the calendar. It’s going to look something like this. And now we’ll shift it and rotate it. I might even go into the puts, depending on how we get positioned here.
Take a look at this.
This is very similar to the stock. And I can play with this. I could go to 130 and 135. And I could even do the puts or the calls. But in this case, let’s do the calls. You can see that right here, as that stock goes up, I’m still making money.
The power behind this versus maybe the stock is taking a look at what I could do. If I’m even more bullish on this, I could rotate it to the let’s say 125. And now I’ve gotten a little more power in that.
I could rotate it even further. Now I’ve gotten even more power on that. And as it continues to go up, let’s say came into this area, I could continue putting another one of these on.
I could go to the next month and the next month and the next month time and time again. Isn’t that what you’re doing anyway with a stock – you’re just holding it month after month.
And that’s the same thing here. Now the big difference here is if I see a pullback and the stock price is 130. And I see a pullback or that stock just went up to the moon 20% in a single month or something like that. And I was just making a boatload of money and all of a sudden I say it’s running a little too quickly.
Well, I could do a calendar now instead. It still got that positive Vega. Or just do something a little less extreme and just do a slight little rotation. Or I could dial this back to the 120 and 125. So I still get a tiny bit of upside movement but very little.
It just goes to show you the flexibility behind it as a retirement strategy that I’ve got much more room now to the downside. Still again, you’d lose just like you would with a stock. But you got more room, and it gives you time if that stock pulls back.
But you still got that long Delta because that’s what a retirement strategy is. It’s long Delta for upside movements holding things time in and time again. And you’re making money from appreciation or dividends.
And in our case here at the theta decay has that stock continues or options continue to decay.
I hope this gave you some thoughts and insights as you continue to trade or look into your retirement strategies.
Maybe gave you some ideas to think about as you start evolving and developing your portfolio.
