Double Diagonals

Question 1

what it is

Answer 1

• four options: one put spread, one call spread
• everything’s off kilter on strikes and expiration
• distance between the two closest strikes of the spread is up to you
• the sold options should have the same expiration date and same thing with the bought options

Question 2

trade setup

Answer 2

put spread: sell one at higher strike, buy one at lower strike
call spread: sell one at lower strike, buy one at higher strike

Question 3

Environment to enter trade

Answer 3

• enter when you anticipate minimal movement in underlying and the underlying would be somewhere in the center of the two sold strikes
• really a delta neutral trade; don’t want to be too bearish or bullish
• looking for underlying implied volatility to be somewhat low
• ideal situation is for the underlying to stay between your short strikes

Question 4

Profit potential

Answer 4

• max profit is at the two peaks of the graph which will be the sold strikes but is impossible to calculate because you’re trading two spreads with four different strikes and two different expiry months
• potential profit is limited to net credit received for the sale of the front month options + net credit when closing back month options - original net debit paid for back month options

Question 5

double diagonal Greeks

Answer 5

• delta neutral trade so delta should be pretty flat
• Vega has by far most impact, will be highest
• move in IV, event the smallest like 1-3% can have significant effect on the trade
• positive move in implied volatility can have a solidly positive effect on the option’s value
• negative move in IV can have a really significant downside effect on the value
• decrease in IV will bring breakevens closer to your short strikes and increase in IV will move them further away from short strike

Question 6

max loss

Answer 6

limited to difference between strike prices less premium received

Question 7

tips to manage

Answer 7

• look at your expiry graph
• most brokers like TDAT let you take into account potential changes in IV levels
• best way to look at it is assume no change in volatility over course of the trade
• d

Question 8

ideal scenario

Answer 8

for underlying to stay within two sold strikes until near expiration when you want volatility to spike up, ideally move towards sold strikes

Question 9

what instruments to trade

Answer 9

• stocks that are greater than $30
• IV is in lowest third of its two year range
• non trenders/sideways movers
• low volatility for sideways movement
• non earnings months so we don’t have earnings news since we don’t want movement in the underlying
• boring/predictable industries not biotech or really any tech