What is a double diagonal option strategy?
A double diagonal is a four-leg options strategy: you sell a near-term out-of-the-money call and a near-term out-of-the-money put, and buy a longer-dated call and a longer-dated put at strikes further out of the money. It combines a call diagonal spread and a put diagonal spread on the same underlying. The position profits when the stock stays inside the range between the short strikes while the near-term options lose value faster than the longer-dated ones. It is usually opened for a net debit, and the maximum loss is generally limited to that debit plus any adjustments.
Is the double diagonal bullish or bearish?
A double diagonal is a neutral strategy. It profits from the underlying staying within a range, not from a large move in either direction. Choosing strikes closer on one side can tilt it slightly bullish or bearish.
Is the double diagonal a beginner or advanced strategy?
The double diagonal is an advanced strategy. It has four legs in two expirations, so its value depends on price, time decay and changes in implied volatility at the same time, and it usually needs active management around the near-term expiration.
When to use a double diagonal
Use a double diagonal when you expect the stock or index to stay in a range through the near-term expiration and you expect implied volatility to hold steady or rise. It resembles an iron condor, but the longer-dated long options keep value after the short options expire, which gives the option of selling new near-term options against them.
Risk, reward and probability of profit
A double diagonal has limited risk and limited reward. The profit is largest if the stock finishes near one of the short strikes at the near-term expiration; losses grow as the stock moves well beyond either long strike or as implied volatility falls. Probability of profit depends on how wide the short strikes are relative to the expected move.
How the Greeks affect a double diagonal
- Theta is positive: the short near-term options decay faster than the long options.
- Vega is positive: a rise in implied volatility, especially in the longer-dated options, helps the position.
- Delta is near zero when opened and changes as the stock moves toward either short strike.
- Gamma is negative near the short strikes as the near-term expiration approaches, so sharp moves hurt.
How to adjust a losing double diagonal
When the stock moves toward one short strike, you can roll that side's short option up (calls) or down (puts) and out, close the threatened side, or close the whole position. Adjustments cost commissions and can add risk, so set your adjustment and loss limits before entering.
When to exit a double diagonal
Exit or roll at or before the near-term expiration. Common rules are to close when the target profit is reached, when the stock breaks outside the short strikes, or when the loss reaches a preset share of the debit paid.
Double diagonal example with MSFT
With MSFT at $150, a double diagonal could sell a 30-day $160 call and a 30-day $140 put, and buy a 60-day $165 call and a 60-day $135 put. If MSFT stays between $140 and $160 through the 30-day expiration, the short options expire worthless or near worthless and the longer-dated options keep some value, which is the source of profit. Actual profit and loss depend on option prices at entry and implied volatility at the near-term expiration; model it with current prices before trading. This example is educational, not a recommendation.
Related reading
Double Diagonal Option Strategy
Leverage Vega to Maximize Your Option Gains
MarketXLS templates for modeling options strategies in Excel are in the MarketXLS templates library.
