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Let's say company A is currently trading at 100.

I bought to open 10 puts for company A at 100 strike price in Jan 2015.

What risk am I exposed to by selling shorter term weekly puts (strike < 100) against that position?

For example, I sell to open 10 puts at 90 strike price that expire this week. If at the end of the week, the stock ends at 95, I pocket the premium. On the other hand, if the stock ends at 85, shouldn't my broker be able to convert my long puts to cover it?

Seems like it should work like a covered call... but can't find the name of this strategy by searching in google.

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Figured it out. Diagonal spread

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As you figured out, it's a diagonal spread. Buying a long dated call LEAP and writing shorter dated OTM call against it is often called the Poor Man's Covered Call (PMCC) because it has a somewhat similar performance to a covered call. If done with puts, it's also called a Poor Man's Covered Put.

The advantage is that since less capital is necessary, it has a higher ROI and lower risk.

Avoid selling these if it locks in a loss. That occurs if the cost of the position exceeds the difference in strikes. For example:

XYZ = $50

$50 put LEAP = $4.25

$47.50 two month put = $0.50

The cost is $3.75 and if XYZ collapses and you exercise you LEAP to cover the assigned short put, you'll only get $2.50 for the spread. You could mitigate this if XYZ dropped slowly by rolling the short put down.

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  • Thanks for your answer. The question is about puts instead of calls.
    – Tyler Liu
    Commented May 31 at 9:44
  • Diagonal call spreads similar to diagonal put spreads except that the direction is different. Be that as it may, I edited my response to make it clearer.
    – Bob Baerker
    Commented May 31 at 16:36

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