Real-World Trading: The Diagonal Spread

One of the biggest advantages of trading options is the ability to create numerous strategies that can fit your risk profile and market outlook. However, this flexibility comes at a cost, which is time. Because so many strategies can be implemented using options and stocks, we need to spend time understanding them.

I particularly like options because they allow us to hedge risk while still achieving solid profits. If we choose to trade only stocks, we're limited to bullish or bearish outlooks. But stocks often trade sideways, meandering back and forth in a range. We're looking for this type of movement -- or lack thereof -- in a stock when we're interested in entering a diagonal spread. ...