Strategies · Library · Options
§2.21Carry
Diagonal put spread
Hold a deep in-the-money, longer-dated put that tracks a falling stock and sell short-dated out-of-the-money puts against it to earn income.
- Asset class
- Options
- Held for
- Varies
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Bearish: expects a slow decline while the short puts expire worthless.
- Entry and exit
- Buy a deep in-the-money put with a long expiry; sell an out-of-the-money put at a lower strike with a short expiry. Roll the short put each cycle unless the stock rises above a stop price, then unwind.
- Sizing
- 1:1 (one long far-dated put, one short near-dated put at a lower strike)
How it fails
- Maximum loss is the net debit
- Gain capped near the short strike
- A rising stock erodes the long put
- Time decay helps short leg; assignment risk
Data it needs
- options chain with strikes and premiums
- implied volatility by strike and expiry
- underlying daily price
ARCANE has the underlying daily close but no options chains, strikes or implied volatilities
How ARCANE uses it
Matches a slow-decline Call over several months. Paper only.
Needs puts and a bearish position, not available long-only.
Filed under the carry card
Own what pays more than it costs to finance (the return if prices stand still) and sell what pays less, across currencies, bonds, commodities and stock indexes.
A paper plan from this card holds 21 to 252 days, stops at 2× the expected move and uses at most 75% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.21, p. 26 of the SSRN version. Described in our words. Carry is ARCANE’s filing, not the book’s.