Contents

Double Diagonal

Double Diagonal Calendar spread is a combination of Diagonal Call Calendar Spread and Diagonal Put Calendar Spread. The strategy is based on the fact that near month options decay faster than the next month or far month options. The pay-off diagram looks curved as it involves multiple expiration dates.

Trade Set-Up

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Sell OTM Call in Near Month

short call-Finvezto

Sell OTM Put in Near Month

short put-Finvezto

Buy OTM Call in Far month

Naked Call 1-Finvezto

Buy OTM Put in Far Month

Naked Put-Finvezto

Double Diagonal

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Trade Set-Up
  • Sell an Out-of-the-money Call Option in the near month
  • Sell an Out-of-the-Money Put Option in the near month
  • Buy an Out-of-the-Money Call Option in the next or far month
  • Buy an Out-of-the-Money Put Option in the next or far month
  • Entry Checklist

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    Market Outlook
  • Neutral Outlook
  • Price should be trading between a true support and resistance zone
  • Volatility
  • While entering the position, it is better if the volatility is low
  • As the near month option expires, if the volatility increases it will benefit you as the value of the far month options will increase.
  • Open Interest
  • Equal build up of PUTs and CALLs at support and resistance levels is ideal as we want price to stay in a range.
  • Strike Price
  • Sell Current month OTM strikes and Buy Next Month OTM strikes
  • Positional or Intraday?
  • Holding positions overnight is recommended as you can capture overnight decay.
  • Intraday returns are low.
  • Risk Profile

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    Risk [Loss]
  • Maximum Risk is limited. But still, position needs to be managed with stop loss of 1-2% of your capital.
  • Reward [Profit]
  • Maximum profit is limited. Maximum Profit can keep on changing during the period, depending on the increase in volatility. But, it is limited.
  • Break Even Point
  • In this strategy, there is no exact formula to calculate break even point. But the break even points lie just outside the near month CALL and PUT OTMs.
  • If the price stays between the strike of the CALL and PUT OTMs, you will profit.
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay is helpful for this position
  • Al Calendar spreads work on Time decay principle
  • Volatility impact [Vega]
  • When the near month options expire, you want the volatility to go up. This will ensure that the far month options that you bought will be trading at a higher premium.
  • Price Impact [Delta]
  • As long as price stays between the strikes of the near month options, the position is safe.
  • In the last week or 2 days before expiry, if one of the near month options is In-the-Money, then it will move at a faster rate than the far month option. Be prepared to adjust the trade in that case.
  • Trade Management & Exit

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    Rolling & Adjustments
  • Roll the near month CALL and PUT options when they start turning In-the-Money
  • Do not keep on rolling indefinitely as it might compound losses
  • Stop Loss
  • Stop Loss should be set in such a way that Risk is limited to 1-2% of your entire capital
  • Roll your position first if applicable before exiting through Stop Loss
  • Exit Conditions
  • Exit when price breaks the trading range
  • Exit when your loss is 1-2% of your capital
  • A Word of Caution

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    Alert:

    • This is an Advanced strategy and should be traded only by seasoned traders as it involves rolling and adjustments. Do demo trading before you implement a trade.
    • Be cautious during the last 2 to 3 days of expiry. All the time decay gains that you got over several days can be erased in a jiffy.
    • Trade only on Indices as they are less volatile.