A Double Diagonal is an options trading strategy used most commonly to profit off a consolidating (sideways trending) stock in a low volatility market environment. To create a Double Diagonal, A Trader must enter a long and short positions in two options of different types (one call and one put) with the same expiration dates and different strike prices, and two options of different types with the same expiration dates (must be different from the first groups) and different strike prices (must be different from the first group, and the low strike price must be below the low in the first group while the high must be above the high in the first group).
I realize this sounds very confusing, so let me give you an example. Let's say you think SPY is going to churn sideways from here and you decide you want to capitalize via a Double Diagonal. You decide you want a range between 116 and 123. In order to create a profit range within these points, you could take the following steps.
- Sell the May 119 Put and May 120 Call
- Buy the June 118 Put and June 121 Call
This action will result in something that looks like the following...
This is an advanced Options strategy, and should not be attempted by a beginner options trader.
Double Diagonals are sometimes seen in an Options Trading System. This only applies to options trading, so you will never see it in a stock trading system or futures trading system.
Related Terms: Calendar Spread, VIX