I first noticed this trade thanks to Matt Haley a week or so ago. I did not get into it until today. Here's how I placed my order:

First the trade: Long June 110 Put and short the April 90 Puts for a debit of 17.45

This gives us a delta delta of around 40%, the delta on the April 90 is about 32% at the time I placed the trade. The delta for the June 110 put is 71%. This diagonal formula was introduced to me via Matt Haley and further explained by Mojo at Insanemoney.com.

I'm figuring my sizing based off of a $100,000 account. Using 2% as my max amount of loss I'm willing to take I sized it as follows:

17.45 x .20 = 3.49 I don't like losing more then 20% on any one stock at a time

3.49 x 100 = $349 per contract (because your are controlling 100 shares per contract)
2000 (2% of 100k) / 349 = 5.73 This shows me how many contracts I can put on, if I use a 20% stoploss
5 x 349 or $1745 on this trade(Amount of loss I'm willing to accept)

So 5 contracts is my magic number.

Now that I got filled at 17.45, I want to set a stoploss for 17.45 x .80 (since I'm willing to lose 20, I take 100-20=80). The stoploss should be set to 13.69.

In TOS, after the trade has been filled, just highlight both the long and short, and right click. You want to select "Create Closing Order" just like if you were going to get out. On the trade tab, once you click on "Sell -5 Diagonal SHLD...." the only three things you change are in the Order Entry section toward the bottom. I highlight and write in my own price, 13.69. I change the ORDER from LIMIT to STOP. I change RULES from DAY TO GTC. Then Confirm and Send.

That's it!



MdrNate