All Strategies Income Bullish Bearish Neutral Volatility
Are you looking for this? The Options Wheel Strategy: The Complete Guide To Boost Your Portfolio An Extra 15-20% With Cash Secured Puts And Covered Calls

Double Diagonal

Overview

If the Christmas Tree Butterfly made your head spin, wait until you meet the Double Diagonal – the options strategy equivalent of a chess grandmaster's opening move. This is where the options pros separate themselves from the amateurs, creating a position that's both elegant and adaptable.

Think of the Double Diagonal as running a sophisticated options time machine. You're buying longer-term options for protection while selling shorter-term options to collect premium. Specifically, you're buying an out-of-the-money put and call in a farther-out month, while selling an out-of-the-money put and call in a nearer month. The beauty? You profit from time decay while maintaining flexibility as market conditions change. It's like being a landlord who collects rent every month but can also renovate the property as needed.

Key Characteristics

  • Market Outlook: "I think this stock will stay in a range for now, but I want flexibility if I'm wrong"
  • Risk: Limited but can get spicy if the stock makes a big move before your short options expire
  • Profit Potential: Moderate but repeatable – think of it as a strategy that can keep giving
  • Breakeven Points: Multiple and constantly shifting – this is a living, breathing strategy

When to Use

The Double Diagonal might be your strategy of choice when:

  • You expect a stock to trade sideways in the near term but want protection if it decides to run
  • You're looking to harvest time decay – that sweet, sweet theta – on a regular basis
  • You want a position you can actively manage and adjust as market conditions evolve
  • You're comfortable with complexity and enjoy the chess match of options trading
  • You want to create an options position that can potentially generate income over multiple expiration cycles

Real-World Example

Let's walk through this with a concrete example. Say XYZ stock is trading at $50, and you think it will stay between $45 and $55 for the next month, but you want flexibility beyond that.

  • You buy a 3-month $45 put for $2 per share ($200 total) – this is your downside insurance
  • You sell a 1-month $45 put for $0.75 per share ($75 total) – this is your near-term rent collection
  • You sell a 1-month $55 call for $0.75 per share ($75 total) – more rent collection
  • You buy a 3-month $55 call for $2 per share ($200 total) – your upside insurance
  • Your net cost is $250 for the whole position ($2.50 per share)

Now let's see what happens in different scenarios:

  • If XYZ stays between $45 and $55 for the next month: Your short options expire worthless, and you keep the $150 premium. You still have your long options for another two months, and you can sell another set of short-term options against them – rinse and repeat!
  • If XYZ drops to $42 before the front-month expiration: Your short $45 put loses money, but your long $45 put provides protection. You might have a small loss, but it's contained.
  • If XYZ rises to $58 before the front-month expiration: Your short $55 call loses money, but your long $55 call provides protection. Again, any loss is contained.

The real magic happens after that first month. If the stock has stayed in range and your short options expired worthless, you can sell another set of 1-month options against your remaining long options. This creates a potential income stream that can sometimes exceed your initial investment before your long options expire.

The Good Stuff

  • You get to be a time decay harvester, collecting premium from short-term options
  • It's a flexible strategy that can be adjusted as market conditions change
  • You can potentially generate income over multiple expiration cycles
  • Your risk is defined and limited by your long options
  • You can profit whether the market moves slightly up, slightly down, or sideways
  • It's a strategy that rewards active management and market knowledge

The Not-So-Good Stuff

  • It's complex – this is definitely not a "set it and forget it" strategy
  • You're dealing with four different options, which means higher commission costs
  • There's always the risk of early assignment on your short options
  • It requires more capital than simpler strategies
  • If the stock makes a big move before your short options expire, you could face losses
  • The profit/loss diagram looks like a roller coaster – not for the faint of heart

Playing It Smart

  • Choose your strike prices based on technical support and resistance levels – don't just pick random numbers
  • For expiration dates, the sweet spot is usually 30-45 days for front month and 60-90 days for back month
  • Monitor your position regularly – this strategy requires attention, especially as front-month expiration approaches
  • Have adjustment plans ready if the stock approaches either of your short strikes
  • Consider rolling your short options (closing them and selling new ones) if they're at risk of being assigned
  • Be strategic about when you sell your next round of short options after the first set expires
  • Don't get greedy – if you've made a good profit, consider closing the position rather than risking it all
  • Avoid earnings announcements and other high-volatility events that could blow up your position