Double Diagonal Spread

What is a Double Diagonal Spread?

A double diagonal spread combines two diagonal spreads — one using puts and one using calls — at different strikes and different expirations. You sell near-term options at two strikes (one put below and one call above the current price) and buy longer-term options at strikes further out. This creates a position that benefits from time decay on the short legs while maintaining protection from the long legs.

Think of it as a double calendar spread with directional offsets on each side. It creates a wide profit zone where time decay works in your favor, and the different strikes give you flexibility in how you position the trade.

How to Set It Up

• Buy 1 longer-term put at a lower strike (below the short put)
• Sell 1 shorter-term put at a higher strike (still below current price)
• Sell 1 shorter-term call at a lower strike (above current price)
• Buy 1 longer-term call at a higher strike (above the short call)
• Same front-month expiration for both short options
• Same back-month expiration for both long options
• Typical strike layout: Long put at $90, short put at $95, short call at $105, long call at $110

The net debit is the total of all four legs.

When to Use This Strategy

Use a double diagonal when:

• You expect the stock to trade in a range
• You want broader flexibility than a double calendar
• IV term structure is favorable (front month IV higher than back month)
• You want to roll the short options repeatedly for income
• You are comfortable managing a four-leg position across two expirations

Double diagonals are popular among experienced traders who run them as recurring income strategies, selling new front-month options each cycle.

Example Trade

Stock XYZ is trading at $100.

• Buy 1 XYZ $90 put (90 days) for $2.20
• Sell 1 XYZ $95 put (30 days) for $1.80
• Sell 1 XYZ $105 call (30 days) for $1.60
• Buy 1 XYZ $110 call (90 days) for $1.40
• Net debit: ($2.20 + $1.40) - ($1.80 + $1.60) = $0.20 ($20 total)

If XYZ stays at $100 at front-month expiration: Both short options expire worthless. The long options retain time value. You can sell new front-month options for the next cycle. The long options might be worth $3.00-$3.50 combined, giving a nice profit.

If XYZ moves to $95 or $105: One side is pressured but the long options provide some protection. The position is manageable.

If XYZ moves to $85 or $115: Both the short and long options on the pressured side have value, limiting losses. Max loss is approximately the debit plus the difference between short and long strikes on the losing side.

Risk and Reward

• Max profit: Occurs when the stock stays between the two short strikes at front-month expiration. Depends on remaining back-month option values.
• Max loss: Approximately the debit paid plus the risk on the wider side, reduced by the time value of the long options. Typically much less than the combined spread widths.
• Breakeven: Roughly beyond the short strikes, adjusted for the time value of the long options.

The profit zone is wide and the trade is forgiving if managed actively.

Tips and Common Mistakes

• Keep the short options closer to ATM than the longs. This maximizes your time decay advantage.
• Roll the short options when they expire. This is designed to be a repeating income strategy.
• Watch for a sharp move in either direction. Adjust or close the threatened side if the stock approaches a short strike.
• IV changes affect both sides. A broad IV decline hurts the back-month options and compresses the overall value.
• This is a complex four-leg trade. Make sure you are comfortable with the mechanics before sizing up.

Related Strategies

• Double Calendar — two calendars at the same strikes but different expirations
• Iron Condor — simpler four-leg neutral strategy at a single expiration
• Call Diagonal Spread — the single call version