-The Double Diagonal is a non-directional four option trade that can be set up as either a credit or debit spread.  It is preferred to set it up for either a SMALL debit or a SMALL credit.  It may be tempting to seek out a trade with high front month volatility, but it is suggested to avoid such situations because high IV may be indicative of a large impending move which can be adverse to the Double Diagonal.  The risk in the trade is the difference in the spread between the short and long option less the credit or plus the debit as the case may be.  The reward can be hard to determine because volatility will impact the resulting profit.  Ideally, you want to enter the trade at a point of low volatility with an expectation of increasing volatility.

 The trade is similar to an Iron Condor in that we sell out both Puts and Calls usually in the front month and we have protective outside strike long Put and Call options. The difference is that the long options are in the back month.  So instead of two verical credit spreads as is incorporated in the Iron Condor, we have two diagonal spreads thus, Double Diagonal.

The roll to the back month is when the most money is made in the position.  If the stock remains fairly stagnant we can then buy back the decayed front month short put and call and roll to the same strike in the same month as the original long options.  The resulting position is now an Iron Condor.  If the stock does remain stagnant into the roll, we should end up with a very attractive risk reward on the Iron Condor.

Study the risk graph and you should gain understanding of the risk and reward of the position.

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