29 lines
1.7 KiB
Plaintext
29 lines
1.7 KiB
Plaintext
Double Diagonals
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A double diagonal spread is the simultaneous trading of two diagonal
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spreads: one call spread and one put spread. The distance between the
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strikes is the same in both diagonals, and both have the same two expiration
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months. Usually, the two long-term options are more out-of-the-money than
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the two shorter-term options. For example
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Buy 1 XYZ May 70 put
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Sell 1 XYZ March 75 put
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Sell 1 XYZ March 85 call
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Buy 1 XYZ May 90 call
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Like many option strategies, the double diagonal can be looked at from a
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number of angles. Certainly, this is a trade composed of two diagonal
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spreads—the March–May 70–75 put and the March–May 85–90 call. It is
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also two strangles—buying the May 70–90 strangle and selling the March
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75–85 strangle. One insightful way to look at this spread is as an iron
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condor in which the guts are March options and the wings are May options.
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Trading a double diagonal like this one, rather than a typically positioned
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iron condor, can offer a few advantages. The first advantage, of course, is
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theta. Selling short-term options and buying long-term options helps the
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trader reap higher rates of decay. Theta is the raison d’être of the iron
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condor. A second advantage is rolling. If the underlying asset stays in a
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range for a long period of time, the short strangle can be rolled month after
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month. There may, in some cases, also be volatility-term-structure
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discrepancies on which to capitalize.
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A trader, Paul, is studying JPMorgan (JPM). The current stock price is
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$49.85. In this example, JPMorgan has been trading in a pretty tight range
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over the past few months. Paul believes it will continue to do so over the
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next month. Paul considers the following trade:
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