Recent banking crises involving Signature Bank (SNBY) and SVB Financial (SIVB), have caused JPMorgan Chase (JPMorgan Chase) to fall.
A diagonal spread is a strategy that I use when a company experiences a large drop in quality.
This option strategy uses options with different expirations and strike prices. It is considered an advanced strategy.
Let's take an example: JPM stock trades between 110-130 on March 31. This will be a good example.
The trade I am looking at is the sale of a March 31 put with strike price 115 and purchase of an April 14 put having strike price 110.
The March 31 put was expected to be available for sale on Wednesday at 1.30. For 1.55, you could buy the April 14 put.
Net Cost of Trade $25; Max Profit Of $275
The trade would cost $25. This is the maximum trade could lose on the upside.
Trades are at risk with potential losses up to $525. This is calculated by multiplying the spread (5%) by 100, and then adding the trade cost (25).
Maximum potential gain is approximately $275. This would be if JPM stocks close at 115 on March 31.
Trades have a profit zone of between 110 and 130.
It makes sense to aim for around 10%-15% return, so I would set a similar stop-loss.
A sharp fall in JPM stock during the trade is the worst case scenario. To minimize losses, I recommend closing the trade if the stock falls below 115 within the next few days.
Trade equals owning one JPM share
Delta of +1 is the initial trade setup. This means that the position roughly equals 1 share of JPM stock. This delta number may change as the stock moves.
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It is important to remember that all options can be risky and that investors could lose 100% of their investment.
This article is not intended to be a trading recommendation, but an educational tool. Before making any investment decision, always do your research and consult your financial advisor.