 Hello, Extraders, and we're going to quickly cover diagonals today, but not so much the how-to's and the theory behind diagonals. We're actually just going to jump in to an example trade, and I'll see how much that makes sense to you guys before the actual time-spread video that I'm going to be posting next month. So here it is, basically a diagonal profit chart looks somewhat like this chart here on the right, and we're always going to be comparing those when we talk about time-spreads to the calendars. The only difference is, as you can clearly see, that diagonals are skewed in one or the other direction just a little bit. So basically what that does is, in this case, as you can clearly see, the left leg of this diagonal is lifted up a little bit above the break-even line, or the zero line, whereas here you would actually get a loss on the stock price downside. So in this case, you can basically skew the diagonal to the left or to the right, bearish or bullish. That is going to be the main difference between calendars and diagonals. So let's go ahead and look at an example. I hope this will make a lot more sense than if I were to just jump into the theory. So Caterpillar is a stock that I had been looking at for a while. Of course, it's expensive, so the minute you think expensive, you think of spreads. If you are a trader who is not willing to spend $400, $500, $600 on one options contract, then you can go ahead and basically use a spread to reduce the cost. The way that works, we saw it on this video here on verticals, is that you still buy the expensive long call in this case that you want, but you go ahead and you offset it by selling a similar call. And in the case of the vertical, those have the same expiration date. In the case of time spreads, they have different expiration dates and possibly different strikes. In the case that we're going to look at today, which is a diagonal, it's going to have a different strike and a different expiration. So what do we see in the chart here? As you can clearly see, it had been trading in a little bit of a range up here before it dropped. And this is a one-year chart, and then it traded in a range here as it basically trended downwards along with the rest of the market, but then it started trending up. And Caterpillar has been quite strongly, quite bullish lately. So we do have a bullish, basically projection, or I have a bullish projection for cat, but normally big blue chip stocks like this don't rock it up. They don't go parabolic. They go up quite strongly depending on what's going on in the economy, and then they consolidate for a while, and then they go up again, and then they consolidate again. So what we're looking at here is basically the situation where we want to not be so bullish or bearish. So it just made a run up, and we're basically expecting it to consolidate. So what we're going to do is we are still bullish longer-term on the stock, but could be a little bit bearish on the near-term. So what are we saying here? We want to get into a bullish trade on a ticker such as cat, but it's going to happen over a long period of time. So this is the June 16, 2023, 270 call. It's currently trading at 250 something, okay, 257 as you can see here, and we expect this to go to 270, but cat is a slow mover. It's going to go up and down, and it's going to go up and down very slowly. So we would expect this to reach 270, but we want to give ourselves time, because that is what basically kills options premiums, and that's why a lot of option traders, which are usually option buyers, end up losing money. More than 70% of all options expire worthless. And so if you were on the buying side of that option, then you're basically left with a worthless contract. So you give yourself time so that you can actually reach your target. Now the longer you go out, the more expensive option contracts are. So what you do is you sell a call, similar call against that long call. That similar call that you sell is way, way short dated. So this is basically a six month difference between the one we're selling and the one we're buying. So we're selling, and I actually ended up doing two by mistake because I wanted the actual 267.5 call as a short call, but I mistakenly selected the 260 call and I ended up with it. So let's go ahead and see what this looks like. Basically we saw on that chart the calendar is a very symmetrical profit and loss chart. You have one area or one strike, which is where you will profit the most. In this case it's the 260 because remember we're talking about this top one here. It's always going to be your short strike. That's where you want it to end up because that's where you'll have the most profit. And if we skew it a little bit, right, so this is the second one, it's farther away from the 257, it's the 267, so 10 points out of the money to the right, then that peak or the maximum profit shifts over to the right. So we are expecting it to basically go up to 267.5 but not so fast. So we do believe it's going to be below 267.5 on the short term. So we do a short, you know the January is going to be a short 267.5 but it's still bullish because in the longer term we're expecting this thing to go higher, alright. So what happens? Here we go. It's basically, excuse my chart here, it has two peaks because I did intentionally a double diagonal. So I ended up buying two diagonals and I wasn't supposed to but it was a mistake. So this is what a chart of a double diagonal looks like, which is actually a thing so you guys can look into that as well if you want. But this is basically what we end up with. This was about two or three days after I put the trade on and as you can clearly see Caterpillar has been going up 257.73 from 257.20 so it has been going up, up and down actually but mostly up and therefore the ones that are still profitable are the short calls because it hasn't gotten close to 260 or hasn't reached 260 on either of them and it hasn't reached 267.5. So that is why these are green and that is what you want. You want these to be green in the short term because you don't expect these calls to reach the strike, okay. So what you're doing is that, remember you paid, I can't believe it was around $200 or $300 for these long calls and basically what you're going to be doing is chipping away at that $300 contract that you paid for by collecting these $100 basically every week. So how many weeks do we have before that? Well, if we're talking about six months and you have four weeks that's about 20 or so weeks before then. So you can collect premium 20 or so times before that which will bring the cost of that contract way down. So here this is already set to go. We can go ahead and buy these back because we are 107.50 in the money here, well profitable here and we are $52 profitable here, okay. And there's a lot of things that you can build these diagonals around when you expect volatility to come down because you sold these so when you sold them you better have had high premium which means high volatility. So when you buy them back you want these to be obviously cheaper so what that means is that you want volatility to come down. So you usually put these on before IV crush and what's going to happen here is that now you have these two calls which are ready to be sold or bought back rather and that is what we did. So let's go ahead and look at what was going on. Caterpillar basically reached this high and it topped out around here and this is actually the 15 minute chart of this peak right there as you can see it made that high of 260.5 and then ever since then it came back down and as it tried to run back up you can clearly see that it wicked out and there was this was I was expecting this to come back down which it did and that is when those sold calls were going to be profitable and a lot of the other market and tickers and specific tickers such as PFE, Back and Spy which are also blue chips and usually not high growth big tech names were also on the way down. So this is when I went ahead and took advantage of buying back those calls and as we can see here this is what it ended up doing during these past three days after I bought or got into these diagonals and now what I have left are just the two longs okay and these are still for June 16th and those are ready to keep what we're going to do is we're going to go ahead and wait for the market to go back up it did a little bit here on Friday and I expected on Monday to go up a little bit more and I'll go ahead and sell couple more calls for these to convert them back into diagonals okay and I'll go ahead and post these back up when I come so what you do is you basically expect the sold calls to go green once they do even for a little bit you go ahead and you buy them back and then you don't have to wait for expiry obviously but you could if you wanted to and then you go ahead when you wait for the market to go back up a little bit and then you go ahead and get back into short calls because that's if the market goes up that's when those short calls are going to be high and premium so it did go up a little bit on Friday I could have gotten in there but actually I was busy it's something at work but I'm gonna go ahead go ahead and wait for Monday to possibly go back up and they might actually go back up and test this 260.5 resistance which is would be the perfect point moment in time to get back into maybe one of these so I'll go ahead and probably sell another call on Monday and sell another call when it reaches to 60.5 just to see if I can get the best or the most amount of premium for those sold calls and just keep on going okay so after I bought back the short calls this is what I had just my two long June calls but some opportunities showed up and I took advantage so I want to run those by you guys so I decided to sell another call and it was the January 27th so it was that same week for 66 or so dollars and here it is the 262.5 so I want a little bit higher than the 260 original and that one cost me 66 or gave me 66 dollars and then for the other diagonal I went ahead and sold a 260 on the February 3rd week which is the next week so this was the 270 call and it was as you can see here the in the money probability is about 26% so I have my second diagonal set up with two new short calls the January 27 and the February 3rd so I gave myself more time on that second one and what do you know at the end of the day I was already 30 or so dollars in profit and it was January 27 one day to expiry so I went ahead and de-risked so this is what Caterpillar had done that day and I went ahead and bought back just the January one and this is what I got more or less for it about 48 dollars okay so I'm buying back that January 27 because I made a quick 30 bucks on that day and I went ahead and sold another one and I went farther out I already had a 270 for February and I went ahead and got a 275 for February so that was $1 30 $130 so this is my setup for next week both of the short calls are now February 3rd so on the top we can see that first diagonal and you can see that we sold and bought once for a 197 profit and then we sold and bought again for a quick 26 dollar profit so we've made about $2 20 up on that top diagonal and we have sold the new February 3rd call for 137 which we're still sitting on and for the bottom diagonal which was the mistake one actually we've made $86 profit and we're sitting on a sold call for 270 so let's see what happened at the end of the week so these were our two diagonals you can see on the far right hand side and I actually decided to get out of one of them because it was a mistaken diagonal to begin with so I got out of one of them and this is what I ended up with they were both net green or net positive as you can see here the one that I'm left with is also net positive it's a net positive for $80 but I don't want to get rid of this one because I want to keep cycling through those weeklies and moving my strikes up higher so this is what I ended up with with just the one diagonal right now and on Monday and Tuesday which is earnings that have been coming out pretty much in line with some misses as was expected this is what has been happening with Caterpillar and I actually decided that because the end of this week when the Fed announces might be quite bullish that I would exit my February third call earlier three days early and this is what I'm what I've ended up with so you can see here that the bottom diagonal I actually closed out and I ended up making a $126 profit on that one and I am still sitting on the top diagonal where I have the only the long leg so I only have the first June 13 270 call at around 15 5 with this what it cost me so Caterpillar is expected to go up with the rest of the market in this upcoming bullish week so I decided to simply sit on the long call see you next time