Double Diagonal
A bullish call diagonal combined with a bearish put diagonal for maximum flexibility over time.
Profit / Loss Diagram
Double Diagonal at the short expiration
What is this strategy?
The Double Diagonal is a sophisticated structure combining two diagonals at once: a bullish one in calls and a bearish one in puts, both around the current price. This creates a P&L profile that makes money whether price rises or falls, provided the move stays within certain bounds and time passes. It is essentially a long strangle given a diagonal structure so it can harvest theta.
The typical construction is: buy a longer-dated OTM call, sell a near-dated call closer to the money; buy a longer-dated OTM put, sell a near-dated put closer to the money. This results in a low initial debit because each purchased leg is partly financed by the sold leg. The double diagonal is a pure time strategy: it earns mainly from theta decay while price stays relatively stable.
The Double Diagonal suits neutral traders expecting low volatility who want to capitalise on both upward and downward drift, with the emphasis on time-based gains. It requires moderate capital and generates recurring income. It is more complex than basic strategies and demands more frequent monitoring and adjustment, but it offers superior flexibility and interesting risk-reward profiles.
Construction
| Action | Instrument | Strike | Expiration | Example |
|---|---|---|---|---|
| SELL | 1 Call (short) | ATM or slightly OTM | 30 DTE | -1 SPY Mar 430 Call |
| BUY | 1 Call (long) | OTM (higher) | 60 DTE | +1 SPY Jun 435 Call |
| SELL | 1 Put (short) | ATM or slightly OTM | 30 DTE | -1 SPY Mar 420 Put |
| BUY | 1 Put (long) | OTM (lower) | 60 DTE | +1 SPY Jun 415 Put |
Example
Scenario: SPY at $425, you expect low volatility, time-based gains and limited movement in either direction.
- Call Sold (March) -1 SPY Mar 430 Call @ $2.50
- Call Purchased (June) +1 SPY Jun 435 Call @ $3.80
- Put Sold (March) -1 SPY Mar 420 Put @ $2.50
- Put Purchased (June) +1 SPY Jun 415 Put @ $3.80
- Total Net Debit $260 (3.80+3.80−2.50−2.50 × 100)
- Maximum Gain $190 to $290 — at the March expiration with SPY at a short strike: the shorts expire worthless and the June longs retain around $450-550, less the $260 debit
- Maximum Loss Up to around $760 per side — the width between the short and long strikes ($500) plus the debit, reduced by whatever residual value the long leg retains
- Breakevens Around $432-433 on the upside and $417-418 on the downside — estimates, there is no closed formula
The Greeks
Call and put deltas cancel each other out. Small price moves do not affect P&L significantly.
Both short legs decay rapidly, delivering accelerated time gains. Maximum positive theta exposure.
The long legs are longer-dated and accumulate more vega than the shorts: net vega is positive on both sides. A drop in volatility hurts the position.
Short gamma dominates, giving negative gamma. Large price moves produce gamma losses.
Position Management
- 01 Monitor Both Legs Near Expiration At 7 days to expiration, watch both near-dated options. Close whichever is winning and let the losing one expire if it is still out of the money.
- 02 Roll Asymmetrically if Needed If only one near-dated leg is in trouble, you can close and roll it while leaving the other running.
- 03 Define Price-Movement Limits Set a stop if price moves more than 5–7% from the original strikes. Large moves turn theta gains into gamma losses.
- 04 Take Profits at 50% Do not chase maximum gains. If you reach 50–75% of the potential, close the whole position to lock in the result.
- 05 Restart the Cycle After closing, open a new double diagonal with fresh strikes and expirations matched to current market conditions.