Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks

The Double Diagonal Trade

The basic setup of the double diagonal is to sell one out-of-the-money call and one out-of-the-money put with strike prices that are about equally placed from the middle of the price range of the stock. These two short options have the same expiration date, usually one to two months until expiration. To hedge these short positions, buy one call and one put that are even further out-of-the-money, and with at least one additional month until expiration. Because the purchase prices of the long options are less than the sale prices of the short options, the double diagonal creates a net credit.

Another interpretation of the double diagonal is a combination of two diagonal calendar spreads. A diagonal calendar spread with ...