Double Diagonal Spread: Complete Options Strategy Guide

The double diagonal spread is an advanced options strategy that combines two diagonal spreads - one on the call side and one on the put side. This creates a neutral position that profits from time decay while providing flexibility to adjust for directional moves. By using options with different strikes and different expirations, you can generate consistent income while managing risk across a wide range of stock prices. This comprehensive guide explains how to master the double diagonal.

What is a Double Diagonal Spread?

A double diagonal spread consists of four options: two long options with later expirations at wider strikes, and two short options with earlier expirations at closer strikes. Essentially, you are combining a call diagonal spread with a put diagonal spread on the same underlying.

Double Diagonal Structure

The strategy has four legs that work together:

Long Options (Back Month)

• Buy 1 out-of-the-money put at a lower strike (6-12 months out)
• Buy 1 out-of-the-money call at a higher strike (6-12 months out)

Short Options (Front Month)

• Sell 1 out-of-the-money put at a higher strike than the long put (30-45 days out)
• Sell 1 out-of-the-money call at a lower strike than the long call (30-45 days out)

Visual Understanding

Think of the double diagonal as a "tent" structure:

• The short strikes ($90 put and $110 call) form the inner edges
• The long strikes ($85 put and $115 call) form the outer edges
• Maximum profit occurs when the stock stays between the short strikes
• The long options provide protection if the stock moves beyond the shorts

How Double Diagonals Profit

Time Decay (Primary Profit Driver)

The short options decay faster than the long options due to their earlier expiration:

• 30-45 day options have accelerating theta
• 6-12 month options have slower, steadier decay
• This differential creates daily profit as time passes

Volatility Changes

Double diagonals benefit from certain volatility scenarios:

• Long options have more vega (longer-dated)
• Rising IV generally helps the position
• The strategy is slightly long vega overall

Stock Movement

The ideal scenario is the stock staying between your short strikes:

• Both short options expire worthless
• Long options retain significant time value
• You can sell new front-month options for additional income

Profit and Loss Analysis

Maximum Profit

Maximum profit is achieved when the stock closes between the short strikes at the front-month expiration:

• Both short options expire worthless
• Long options still have time value
• Profit = Short premium collected + remaining long option value - initial debit

Risk Zones

Losses occur when the stock moves outside the long strikes:

• Below the long put: Put diagonal loses value, but loss is capped
• Above the long call: Call diagonal loses value, but loss is capped
• Maximum loss is limited to the net debit plus any adverse movement value

Breakeven Points

Breakevens are complex due to different expirations but generally occur:

• Somewhere below the short put strike
• Somewhere above the short call strike
• The exact points depend on remaining time value of the long options

Managing the Double Diagonal

Ideal Scenario: Stock Stays in Range

When the stock cooperates and stays between your short strikes:

• Let the short options expire worthless (or buy back cheaply)
• Sell new front-month options at appropriate strikes
• Repeat this process until the long options approach expiration
• Close the entire position or roll the long options forward

Stock Moves Toward a Short Strike

If the stock approaches one of your short strikes:

• Roll the challenged short: Buy it back and sell a further OTM option
• Roll in time: Move to a later expiration for more premium
• Close that side: Take the loss on one side, manage the other

Stock Breaks Through a Long Strike

If the stock moves past your long strike:

• The long option caps your losses on that side
• Consider closing the entire position
• Or wait for mean reversion back into the range

Double Diagonal vs Iron Condor

Selecting Strike Prices

Short Strikes

Choose short strikes based on your expected trading range:

• Look at support and resistance levels
• Consider expected move based on implied volatility
• Typically 1-2 standard deviations from current price
• Delta of 0.20-0.30 is common

Long Strikes

Long strikes provide protection and define maximum risk:

• Usually $5-$10 beyond the short strikes
• Wider strikes = less protection but lower cost
• Narrower strikes = more protection but higher cost

Selecting Expirations

Front Month (Short Options)

• 30-45 days: Optimal theta decay, most common choice
• Weekly: More frequent management, higher annualized returns
• 7-14 days: Fastest decay but requires more attention

Back Month (Long Options)

• 6-9 months: Good balance of cost and time
• 9-12 months: More sales cycles possible
• LEAPS (12+ months): Maximum flexibility

When to Use Double Diagonals

Double diagonals work best in specific conditions:

• Range-bound markets: Stock expected to stay in a channel
• Low to moderate IV: Long options are affordable
• High IV on front month: Short options collect good premium
• Liquid underlyings: Tight bid-ask spreads on all strikes
• After big moves: Expecting consolidation and mean reversion

Tips for Success

• Choose liquid underlyings: SPY, QQQ, large-cap stocks work best
• Start small: The four-leg structure can be complex to manage
• Plan your cycles: Know how many times you intend to sell front-month options
• Monitor both sides: Set alerts for when stock approaches short strikes
• Take profits early: If you achieve 50% of max profit, consider closing
• Do not over-adjust: Transaction costs add up with four legs

Common Mistakes to Avoid

• Strikes too narrow: Stock easily moves outside your range
• Back month too short: Not enough time to sell multiple cycles
• Ignoring volatility: Position is long vega - falling IV hurts
• Over-managing: Every adjustment has costs
• Illiquid options: Wide spreads destroy profitability

Advanced Techniques

Skewing the Diagonal

If you have a directional bias, you can skew the position:

• Bullish bias: Put short strike closer to current price, call short strike further away
• Bearish bias: Call short strike closer, put short strike further

Converting to Single Diagonal

If one side is deeply profitable:

• Close the profitable side
• Continue managing the remaining diagonal spread
• Reduces complexity and locks in gains

Summary

The double diagonal spread is a sophisticated income strategy that profits from time decay while maintaining flexibility for adjustments. By combining a call diagonal and put diagonal, you create a neutral position with a wide profit range. The key advantages are the ability to sell multiple cycles of front-month options against your long-term positions and the flexibility to adjust as the stock moves. While more complex than simpler strategies, the double diagonal rewards traders who understand time decay and can manage multi-leg positions effectively. Start with small positions on liquid underlyings to learn the mechanics before scaling up.

Looking for simpler alternatives? Check out our guide on single diagonal spreads or learn about iron condors for same-expiration neutral strategies.