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Wide, flat SPX Diagonal Spread


I love to trade SPX diagonals, especially when IV skew is higher than usual and I get a wider range of break evens. I know that time spread break evens are “theoretical” because they are dependent on the IV skew of the front and back month’s IV that changes all the time.

I always wanted to have a mechanism that scans the market for specific SPX diagonals and alerts me whenever find it. That is why I have developed an alert algorithm in the scanner so that I do not have to manually scan for interesting setups all day, but it will alert me.


Let’s see what type of diagonals I like for SPX.

  • Ticker: “SPX” because I am looking for SPX diagonals;).
     
  • Option: “put” means I am looking only for put diagonal spreads.
     
  • Price: “0 – 500” means I am only interested in spreads that have a debit between 0 and 500 dollars. I am only looking for debit diagonals because credit ones would have different directional bets.
     
  • DTE: “0 – 30”, I am looking for the ones with max 30 days to expiration.
     
  • Front delta: “20 – 45” defines the delta distance for the front leg of the spread. This makes it close to the money, but not ATM where the net delta would be positive and I am looking for negative delta.
     
  • Delta: “-100 – 0” is the net delta of the position. In this scan, I am only looking for a negative net delta configuration because then if the market starts to fall, I am immediately making money on the spread. This diagonal is accumulating net negative delta as days go by through the effect of charm Greek.
     
  • Expiration diff: “3”, means I am looking for diagonals where there are 3 days in between the expiration dates. This is typically Friday/Monday expiration. You can also search for various expiration differences.
     
  • Skew: “-100 – 0”, this is the most crucial part of this setup, the horizontal IV skew. This setting states that I am looking for negative skew, which means the front leg has a higher IV than the back leg.
     
  • Strike diff: “5” is the interval between the long and short strikes of the diagonal. If I want to have the scanner look for all the variations, I would set it to 0. But for this setup, 5 is the best strike difference.
     
  • Type: “bull”, there are two types of diagonals for puts and calls. Bull diagonals and bear diagonals. In this setup this is a bull put diagonal which means that the long put has a higher strike than the short put, hence it is more of a range trading setup.
     
  • R/R: “500 – 1000” means I am looking for diagonals that have a reward-to-risk ratio of at least 500%. The R/R is based on the max potential loss vs. the max potential profit of the diagonal.
     
  • C/W: “10 – 100”, stands for the percentage of credit/width I get for shorting the embedded vertical that is found in the diagonal spread. Every diagonal has an embedded vertical spread and with this setting, I am making sure that it’s worth selling that embedded vertical. So if I am looking for a min. of 10% C/W that means when I short the vertical I get at least 10% of the width of the vertical in credit.
     
  • Range: “0 – 100” defines how wide the breakeven range in percentage should be in a calendar spread. I left it on default.
     
  • Min. volume: “1” is looking for legs that have at least a volume of 1 on the current day. With this, you can filter out those that have very low volume, hence wider bid/ask spreads.
     
2022-10-19-09_43_05-1024x298.png


As you can see in the image above, I have only found one SPX put diagonal which had 600% R/R potential and a pretty flat configuration. Let’s go through what the columns mean.

  • Watch: with these icons you can add a spread to your watchlist, analyze the risk graph or copy the trade to thinkorswim format.
     
  • Ticker: nothing to explain here:)
     
  • Exp: the front and back month expiration of the diagonal spread.
     
  • Diff: the day difference between the legs’ expiration dates.
     
  • DTE: how many days are until expiration in the front / back leg.
     
  • Int: the strike difference between the legs.
     
  • Strike: the found strikes of the diagonal spread.
     
  • Opt: option is either call or put.
     
  • Tg%: target %, how far the strike is in percentage move from the current stock price.
     
  • TgΔ: the target delta of the spread which is the front delta in this case.
     
  • Price: debit of the spread.
     
  • Profit: the theoretical max. profit you can make on the specific calendar spread.
     
  • Risk: the risk of the trade, in this case, the debit paid.
     
  • R/R: reward to risk in percentage.
     
  • C/W: percentage credit/width of the embedded vertical.
     
  • Skew: the horizontal IV skew of the legs. Negative means it is backwardated that is the front leg has a higher IV than the back month.
     
  • Range: what is the price range in percentage between the breakeven points of the spread (how wide is).
     
  • Delta: net delta of the spread.
     
  • Gamma: net gamma of the spread. Theta: net theta of the spread.
     
  • Vega: net Vega of the spread.
     

Risk graph of the position

Here is the risk graph of that one diagonal above.

2022-10-19-09_45_05-1024x571.png

You can tell from the risk graph that this configuration is pretty wide and flat in terms of net delta. It makes money with time and direction. Since I love these diagonals, I have created a scan template for it and clicking on the alert button, I will get notified whenever this setup comes around during the day. This is pretty rare, so I might not get an alert every day, but in a high IV environment, it is more common.
 

Diagonal scanner guide

For a more detailed explanation of how to use the diagonal spread scanner please watch the following video.


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