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Diagonal Backspreads

Hi Mark,

I have a question on ratio diagonal spreads that I was hoping you could answer for me.

The spread is as follows: Sell 1 ITM Option, Buy 2 OTM Options where the IV of the front month option is higher than the IV of the back month options (e.g. Sell 1 ITM Nov Call, Buy 2 OTM Dec Calls).

I noticed that the position will lose money if the IV of the Dec options (the ones I am buying) declines. What type of adjustments can be made to this position if the IV of the long options starts to decline?




The backspread is one strategy that I seldom discuss, primarily because it's not easy for individual investors to manage.

The diagonal backspread is a separate category and is worthy of a discussion. 

By definition, the backspread is an option position in which the trader owns more options than have been sold.  Thus, your 2:1 spread qualifies as a backspread.

Vega Risk

When owning options that expire later than the options sold, one unchangeable characteristic of the position is long vega.  Thus, the P/L picture is significantly affected by changes in the implied volatility (IV) of the options – between the time the position is opened and closing time [And that's true whether you exit voluntarily or hold through expiration].

The simplest method to guard against an IV decline is to sell vega.  And the simplest method for doing that destroys the very reason you opened the trade in the first place.  That method is to change the diagonal backspread into a 'regular' backspread.  For example:

a) Sell two Dec/Nov OTM calendar spreads.

This leaves you with the Nov back spread:
Long two Nov OTM; short one Nov ITM
It is not likely that you want to own this position

b) Sell one ITM calendar spread

This leaves you with the Dec back spread
Short one Dec ITM and long two Dec OTM

This idea is unsuitable.  Traders who use diagonal back spreads have a very different market outlook (expiration to arrive with the near term option's strike price being near the underlying price) than those who own  same-month backspreads (hoping for a very big move – so big that the ITM option is very far away from the price of the underlying).

It's nice when the simple method is viable, but in this case it is not.

A more complex solution is to add new positions with negative vega to your portfolio.  However, this requires trading several positions simultaneously, and not every trader wants to do that.



In my opinion, no single strategy is good enough to use all the time.  We must pick and choose our spots.  When IV, as measured by VIX, or better yet, the IV of your specific underlying, is relatively high – and you have no reason to anticipate that it will move higher – that is not a good time for owning positions that are vega rich.

I get it.  You still want to make the play that pays off when expiration finds the stock trading near the strike of your ITM short.  If you have a very strong predictive ability, and if you want to make that play, there are alternative strategies that have less vega risk.  (Butterfly for example).

However, if you predict market direction and future prices, then you should be willing to predict the IV direction as well.  There's no need to get it exactly right.  But, if you believe it's not going higher, I would avoid the diagonal backspread.  That spread is most appropriate when you have some reason to anticipate that IV will not be declining over the next few weeks.

I agree that this is something difficult to predict, but the diagonal backspread comes with vega risk.  You must deal with it or only accept that risk only when willing to do so.

If you insist on using this strategy because you had good results, consider trading smaller size when not confident about future IV direction, and larger size when confident it will incease. 

Another possibility is to divide your trade into two parts.  One is to use your diagonal, but in addition, perhaps you can sell a credit spread with strike prices that suit your prognostication.  That credit spread comes with negative vega.  It won't have as much vega as your diagonal backspread, but it is a hedge in that it partially offsets vega risk.

The bottom line is that it is easy to hedge delta risk, but vega is another matter.  The hedge is to sell vega, and that is difficult when owning diagonal backspreads.


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Managing Double Diagonal Positions

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Hi Mark,

Some specific questions [as follow-up to this post]: if the spread benefits from the price coming
close to the strike of the short option, and gets hurt by the price
shooting across it, why not wait for the price to go through the short
strike by a small amount and then close down part of the position and
progressively close down more of the position as it advances further? 

Why not do that?  There is no reason not to adopt that style.  If that seems to be a reasonable method of risk management to YOU,
then go for it.  Obviously it allows for the maximum possible gain when things go your way.

Just remember that there is real danger – both from the negative gamma (it's worse for a DD than an IC) and vega risk.  To compensate, gains from time decay are very attractive

YOU don't feel the loss potential is too large; if YOU don't feel
queasiness with risk: if YOU think this is a good approach, then it IS a good
approach for you.  The fact that I would not do this should not make any difference to you.

There is no single best way to manage risk.

we do buy insurance as the price moves towards the short strike and the
insuring option (even at a ratio of 1:5) is not as far OTM as the short strike, it
is likely to be expensive (due to the high delta, and volatility may or
may not contribute to the cost), and can at best mitigate the damage.

Yes.  Insurance is expensive.  Especially when it is less far OTM than the option it is protecting.

Let me nitpick on terminology. When I buy insurance, I buy it before it is needed, despite the fact that it may never be needed.  Then it is truly insurance. 

When I buy it 'as needed,' it's more of an adjustment, and not insurance.  An adjustment is needed – right now.

Insurance does far more than mitigate the damage.  If you choose to buy calls or puts (not spreads), the cost is higher, but the protection, and hence profit potential, is UNLIMITED.

Of course I am sure you will bring up the fact that the short strike can
be breached rapidly and decisively and that always happens when I get
into such situations!

I wasn't going to mention it.  A rapid breaching of the short is just
one of the risks that must be taken into consideration when choosing how
to manage risk.  Good things can happen (market stops moving against you).  Bad things can happen Large, rapid strike price breach).  Your
job is to be certain that the large loss does not occur.

One way to do that is to play
aggressively, per your first question, but cut position size. That
certainly cuts risk and should make you less uncomfortable when danger

Also why not open a diagonal in all iron condors (smaller position) on
the downside since the volatility will usually increase on the way down.

There are problems with diagonalizing all
put spreads.  The initial cost is high – and that's very true now, when IV is far above its long-term average.  IC traders collect premium. 
Paying a debit for the put spread may not feel comfortable to them. 

The problem is that a big rally can result in a loss for the put portion (when you pay a good-sized debit).  In that case, you
lose on both the call and put spreads at the same time.   Not a good result.

as mentioned in a recent reply 'weighted vega' is an
issue.  In most cases, IV for the front month option increases by more
than that of the option you own.  If the difference is large enough, you
actually lose on an IV increase.  This is a topic I have pretty much
ignored until now, but I recognize its importance.

I am also intrigued by your choice of short strike that is two months
out. Does it mean that you never hold these to expiration of the short
strike (with the exploding gamma risk), and if not what are your profit

Here's what I have to say about 'never.' 
I never have iron clad rules.  Sure, I hold to expiration week when I do not
want to exit at the available prices.  

My plan is to be out of each trade 3
weeks prior to expiry  [I've already covered a bunch of October 2010 short
positions (calls earlier and puts now)].  But residual positions are
sometimes priced where I don't want to buy them. 

It's not profit vs.
loss that matters – it's the price of the position NOW that affects my decision.  If I don't want to pay the price, and if the risk profile makes me willing to hold for one more day – I do so and then make another decision. Finally one of two things happens.  I get my price, or risk becomes uncomfortable and I exit.

I have no specific profit targets with double diagonals.  I exit the side that is far OTM – when I am satisfied with the cash credit available [I would never pay a debit under these circumstances] or when delta turns (example: This portion of the trade becomes delta positive on a down move).

I exit
the side that's closer to being ATM when I like the cash credit I can
collect when exiting.  Because IV plays a huge role in the price of the
options, I cannot plan a specific dollar profit.





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Double Diagonals

Hi Mark,

I was going through your double diagonals and was not able to glean guidelines as to how to open and manage the trade.

For example, when (how many days out from your long/short strike expiration) do you put on the diagonal, how do you choose the short strike in the near month (your own criteria, if you will please!) and I read somewhere in your blog that you cover them when the delta of your long exceeds the delta of your short (making it more vulnerable to price moves against that leg).

Also when you do take off one leg of the diagonal do you roll up the other leg (since it is very likely that it is now quite far away from the current price).



Hello Rajesh,

You are asking for a whole lesson on how to trade a specific strategy, and that is an entire book chapter in itself.

Double diagonals (DD) are managed similarly to iron condors (IC), but there are enough differences to warrant additional discussion.

First, take a look at these posts that I wrote for InvestorPlace, formerly known as the OptionsZone.  They provide an introduction.


Part I

Part II

Part III

Next, review Chapter 21, if you own The Rookies Guide to Options.

Then look through the previous posts on double diagonals.

Come back with specific questions.


My criteria are not likely to prove helpful to you because I seldom use this strategy.  I only use DD under one condition:  To adjust the vega risk of my portfolio:

a) When my portfolio is short too much vega [That means I have too much risk if implied volatility moves higher.  Of course, I'd profit if IV moves lower], I add some double diagonal spreads.

b) When I believe implied volatility is 'low' enough so that I don't want to be short any vega, then I reduce my portfolio to vega neutral by trading both iron condors an double diagonals. 

c) When I believe that implied volatility is so low that I want to bet that it will increase soon, I'll trade double diagonals almost exclusively.

I consider this strategy to be very similar to iron condors (it is an iron condor with an embedded calendar spread), and usually prefer to trade the simpler to manage iron condor.

If you want guidelines for entering positions, I suggest picking (not trading, just mentally selecting) the calendar spreads you want to own and then trade the double diagonal accordingly.

My preference is to open the double diagonal when the shorter-term option is about two months from expiration and the other is one additional month. 


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Iron Condors vs. Credit Spreads

Hi Mark,

I've been buying spreads recently instead of iron condors
since I fancy myself to be a market prognosticator.

I want to be certain that you know this, although I suspect you do.  Whether you buy a spread or sell a spread with the same strikes (puts vs. calls), it's the same play with the same risk and reward.

Example:  Buying IBM 120/130 call spread is equivalent to selling IBM 120/130 put spread (same expiration).

Thus, whether you buy the call spread, or sell the put spread, it's the same bullish play.

The difference between your spread (or it's equivalent) and the iron condor is that the latter involves selling both a call spread and a put spread.

That strategy
worked for my Jan bull put spread but my Feb bear call spread in RUT is
starting to get a little too close for comfort…hopefully I won't have
to ask you for exit strategies in a few days. 

Once again, I want to mention a pet peeve of mine.  The term 'bull put spread' is unpalatable to me.  I prefer 'sold the Jan put spread.'

If the Feb call spread that you sold is making you nervous, there's not much to an exit strategy.  You just exit at the proper time.  I assume you are referring to adjustments.  Much depends on how far OTM your call spread is when you decide to act.  There are usually good alternatives.

Anyway, I wanted to ask
if my supposition is correct: that the risk is the same for spreads and
iron condors with equal deltas. ie: a spread with a 15 delta and an
iron condor with a 15 delta will both expire ITM roughly 15% of the
time. Somehow I think it's not that simple since it seems the premium
collected has been larger for spreads than iron condors of equal

Right you are.  It's not that simple.

I'll assume you are referring to the same underlying asset, or at least ones with very similar implied volatility.  It depends on what you mean by a 15 delta iron condor. 

If the call spread portion of the IC and the put spread each have a 15 delta, then the IC finishes ITM 30% of the time.

If the sum of the deltas is 15, then yes, one or the other finishes in the money 15% of the time.

The premium for an IC should be double that of a single credit spread, when the call spread and the put spread are each 15 delta.  Double the premium; double the risk.

As an aside, I was wondering what your opinion is on the
current market volatility? It seems the only index worth trading
currently is RUT, but with earnings coming up this month I presume
volatility will only go upwards from here.

I truly don't look at the other indexes, seeking better trading opportunities.  I lack the time, being far too busy writing.

My opinion is that I don't know in which direction IV is more likely to go.  Higher would be my choice if I had to wager, but as recently as Jan 2007, VIX was under 10.  I don't believe earnings season will play much of a role – unless there are many earnings surprises.

If you want to have positions that do better when IV expands, consider single or double diagonal spreads.  They are long vega and both iron condors and credit spreads are short vega.


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Q&A. Iron Condors, Double Diagonals and Impled Volatility

More questions from Don:

IV [implied volatility] and the pricing of IC [iron condors] and DD [double diagonals], you mentioned that trading IC works
better when IV is high and that DD are better when IV is low…but
those are relative…yes the IV affects the price, but it affects
ALL four components relative to each other so that their relative
profitability towards each other is the same?

with DD's but it may be different because of the calender component.
Doesn't IV affect the front month more than the back


For my comfort zone I prefer to trade iron condors when IV is elevated.  When I believe (obviously I cannot be certain) IV is at the lower end of its range, I prefer to trade double diagonal spreads.

This concept is explained in The Rookie's Guide to Options.

For those unfamiliar with the strategies, the iron condor is constructed by selling a call spread and a put spread in the same underlying asset and for the same expiration.

The double diagonal is similar to the iron condor, except the options you buy still have the same strike price, but they expire one month later.

1) The major reason that my strategy selection depends on IV is based on the nature of these positions.  When you own the double diagonal, you effectively own the iron condor plus two calendar spreads.

When IV increases, the value of a calendar spread increases.  That's another way of saying that DD spreads have positive vega.  Positions with positive vega do well when IV increases.

Thus, I buy these positive vega positions when IV is low and  the chances are good that IV will be higher (than it is now) when the front-month options are about to expire.  If IV has increased, I will get a good price when I exit the position and sell my longer-term options.  If IV has declined, I will be forced to exit my position at less favorable prices.

Iron condors have negative vega and do well when IV decreases.  If that IV decrease is significant, it's often possible to exit the trade with a quick, but good-sized profit.  Because these spreads do well in a falling IV environment, I prefer to own them when I believe IV is high and likely to fall.

It's not complicated.

If any iron condor trader wants to own a portfolio that has very limited volatility risk, it's a simple matter to add some double diagonals to the position mix – enough to turn the portfolio vega neutral.

2) Your point about the option prices moving in tandem is not accurate.  When you are selling OTM call and put spreads, those spreads widen as IV increases because the options which you sell have more vega than options you purchase.  That's why the spread has negative vega and it's the reason that higher IV means you can get a higher premium when you sell these put and call spreads.

3) It is true that a rising IV environment usually imparts a larger percentage increase in the IV of the front-month options.  But you do not trade percentages; you trade dollars.  Longer-term options have more vega than their front-month counterparts.  Thus, even though the IV increases by a smaller percentage, it increases by more dollars.  In other words, the premium increases more for the long-term option than the short-term option.  That's why calendar spreads widen (become more profitable) as IV increases.


I have difficulty reconciling "buying a spread" netting me money and "selling
a spread" costing me money so I have just used trading a spread for ease of


When you buy an iron condor you sell the call spread and the put spread.  That means you are buying the iron condor and collecting a credit.

There is no official nomenclature for the options world, and to me, that's a shame.  Many people feel as you do and use the term 'sell' an iron condor when I would say 'buy' the iron condor.

There is a rationale for this, but it's lengthy.  In summary, when you buy a condor spread, you profit when the stock remains between the strikes.  The 'iron' variety of the condor should profit under the same circumstances.  Thus, logic tells me that if I'm buying the condor, hoping the stock remains within a price range, then I'm also buying the iron condor when I also want the stock to be range-bound.

One further point.  Suppose you want to trade a diagonal spread – for example the XYZ Dec 100/Nov 95 call spread.  Your goal is to own the Dec call and sell the Nov call, and you tell the broker to buy the spread and pay a 10 cent debit.

When your broker comes back and reports that you 'bought' the spread at your price, a 10 cent debit, and that you own the NOVEMBER call and sold the DECEMBER call, you will be very disappointed.

What do you do if his explanation is this:  You said 'buy' the spread, so I bought the higher priced option (NOV) and sold the lower priced option (DEC).  How can you complain?  Doesn't that fit your description of buying the spread?  You bought whichever option was higher priced and therefore paid a debit.

That's why 'pay a debit' is insufficient to distinguish between buy and sell orders.  At least in my opinion.

there's still more from Don…


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I Get Stacks and Stacks of Questions. Dear Mark…


Letters, we get letters, we get stacks an' stacks of letters . . .
Dear Perry . . .Would you be so kind, to fill a request, and sing the song I like best?



I have some questions for you on managing risk and complementing IC
positions with double diagonals. In your opinion is it smart for an IC
buyer to also trade some double diagonals to offset vega risk? I am just
getting the hang of IC trading and I don't want to over complicate
things, but I thought I would ask the question and learn more about

Right now I am continuing with my weekly purchase of IC strategy. I
am buying 2 contracts of a RUT IC for the 3rd month (SEP right now)
roughly once a week. I choose short strikes with a delta of 10 and try
to get $1.80 per IC. Right now I have a few put spreads (6 contracts)
left from my August IC positions and have GTC orders on these offering
0.30 each. I also own 6 Sep IC's. For insurance I currently own one
July 420 Put and one July 580 call. My risk curve is fine right now but
once July expiration comes, I will lose the protection. At that point
my current plan is to buy one Aug Put and one Aug Call (I don't want to
pay for more protection right now, as the July Call and Put are still
working. Does this make sense to you?). At the same time (after July
expiration) I will switch to buying the October IC's each week, and put
in GTC orders to close my September spreads offering 0.30 each (This is
my autopilot early close plan that I really like. Of course if my short
strikes are threatened or if time left gets below 3 weeks I will
proactively close at higher prices).

What do you think about my risk management approach? Any suggestions
to improve it? Will adding a weekly DD purchase allow me to avoid
buying the call and put? I very new to trading IC's so I like the idea
of keeping it simple. But I also wonder if there is a way to get better
protection at a lower cost.

What do you think of my strategy as a whole? For getting $1.80 to
start I realize I give up a lot of this to buy back the spreads and for
protection. The math I did tells me that after paying to buy back the
spreads at 0.30, paying for insurance puts & calls and paying for
commissions I am left with a profit about $0.70 – and that is assuming
that everything goes well and I don't have to adjust.

As an aside, I was intrigued by your latest video post where you
mentioned you sold July put spreads with only two weeks left. I thought
about doing the same thing a couple of weeks ago on the call side
because my risk curve was so positive on the upside (when all my Aug
Call spreads had closed automatically for 0.30). However I decided
against it as I told myself I am still learning and didn't want the
added complications of near terms options. Right now my game plan is
"close any short spreads when there is less than 3 weeks left" (My
gut tells me that as a beginner this is prudent).

I look forward to hearing your thoughts, and suggestions. My
apologies for the long post. If you prefer that I break it up on
multiple posts I can do that.




Hello TR,

1) I have mentioned the advisability of combining iron condors with double diagonals to minimize vega risk.  Where have you been, oh trusted reader?

My advice is to offset all or part of the vega risk when you believe vega is reasonably priced.  Own IC  (short vega)when you believe  IV is high (and not going much higher) and own DD (long vega) when IV is low (and you suspect it's not going lower).  If you don't want to express an opinion, then it's always okay to own a combination of positions and remain near vega neutral.

2) If you get $0.90 per side for an IC, don't you find that $0.30 is too much to pay when exiting?  It's fine when two months remain before expiration, but is 30 cents comfortable for you when closing Aug spreads?  This is a question, not a criticism.   It seems to me that giving up 1/3 of the premium and buying insurance and selling low-priced spreads is a tough road to profitability.  More below.

3) Yes, your insurance program makes sense.  But you have overlooked one aspect that requires a decision on your part.  You own the July 420 put.  If the market turns south and RUT is near 440 when expiration arrives, you will own no insurance and replacing it will be costly.

Yes, it feels right to postpone buying Aug insurance options because theta will make them less costly when you buy them later.   And you already own insurance.  But, per the scenario I suggested in #3, waiting may turn out to be a costly decision.

Here's a compromise.  Consider trading 4 IC this week – collecting extra cash and use that cash to buy  a one-lot of Aug insurance.  Note the verb I used is 'consider.'  This may not feel right for you. 

4) The questions you must answer in your methodology:

a) How often will you earn that $0.70?

b) When you don't earn 70 cents, what do you anticipate your average loss will be – if you have the time to exit the trade at your convenience (i.e., not in a panic)?

c) How frequently (obviously an estimate) will you be taking that loss?

d) How much will you lose, and how often, in your worst case scenario.  Perhaps there's a gap opening or perhaps you get stubborn?

e) Combining the above calculations, how much do you expect to earn in an average year?

f) Does the reward justify the risk?

That's your bottom line.  It doesn't matter what I think of your methods.  What do you think of them?  Is 70 cents going to do it for you?  This is like any business – you must have a business plan.  Can you survive on your numbers?  If 'yes,' go for it.  If 'no' where are you going to get that extra income?

5) Do you believe that 'better protection' is available at a lower cost?  That's not generally the way insurance works.

You should want insurance that works for your positions.  The truth is I don't know what that should be.  Owning extra options is 'best' when a very large market move occurs.  But it doesn't help much if there is an IV expansion that occurs without a large move.  I may be wrong, but my belief is that you do the best you can protect yourself.  But sometimes you'll just own the wrong protection and there's nothing you can do about it.  By wrong protection I mean you lose the cost of insurance and your portfolio also loses.

6) Adding some DD positions merely provides limited insurance against an IV explosion.  If the market moves too far, these embedded calendar spreads (DD = IC + calendar) will fail to serve their purpose. [Calendar spreads lose when both options move far into the money.]

7) Regarding my sale of July (front-month) put spreads: I clearly explained that I was selling some of those ONLY because I had just bought in a much larger quantity of July spreads.  I also went out of my way to mention that I had plenty of room – riskwise – to make those sales. 

I closed the same put spread the previous day.  So for example, if I covered 10 IC and decided to sell four put spreads, I obviously can afford that risk (or otherwise I would not have been able to hold the original 10-lot).  Please don't take this the wrong way, but details matter and you should not take sentences out of context.

8) Selling near-term put spreads would not be the same for you – simply because you had not just 'made room' to trade those spreads.  Yes, prudence is intelligent at all times.


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Trading Double Diagonal Spreads; Part II

Part I

Double diagonal (DD) spreads provide profit opportunities that are not available to iron condor (IC) traders.  But, from the point of view that it's possible to lose more money per spread with a DD than with an IC, they can be riskier investment choices.  One immediate disadvantage is they they have higher margin requirements.  While reasonable brokers have identical margin requirements for an iron condor as they do for either of the spreads that makes up that IC (no additional margin to sell a put spread when already short a call spread). That's not true with diagonal spreads.  A double diagonal has twice the requirement as a single diagonal.  That makes no sense to me, but I have no influence over brokers and their rules.

The margin requirement for a diagonal is the difference between the strike prices, less the credit collected (if any), per diagonal. 

Trading RUT iron condors, I choose strike prices that are 10-points apart.  These simply feel comfortable to manage than when the strikes are near each other – but that's a personal comfort zone decision, and not a recommendation.

When trading diagonal or DD spreads, I use strikes that are farther apart.  I confess that this is not based on a sound, mathematical rationale.  It's based on the fact that I prefer to own a diagonal spread that provides a cash credit, or a small debit.  Because of the pricing of RUT options, most of the time I own a diagonal spread in which the strike price of my month 2 long is 30 points away from the strike price of my month1 short.   Occasionally I buy the position when the strikes are only 20 points apart and find these 20-pointers to be easier to manage.

If RUT marches strongly through the short strike, the maximum loss can approach $3,000 per spread (less any time premium remaining in the long option).

I look at it this way (referring to just the call spread, although this point applies equally well for the put spread):  If I have a position similar to: 

 Short 10 GOOG Sep 470 calls

Long 10 GOOG Oct 480 calls

the position is not going to do well on a quick upside move through 470.  Thus, there's upside risk.  If I pay a big debit to open this position – say $500 – then there is also downside risk.  If GOOG drops too far, especially if a few weeks have passed, both options may quickly move towards zero and most of that debit can be lost.  Thus, I trade these spreads to avoid the chance of losing in both directions. [Yes, if it's a double diagonal, the downside move threatens the put spread, but at least it will not also hurt the call spread.]


DD Opportunities Absent from IC

To offset that extra risk, there are profit
opportunities not possible with iron condor positions.

1. If the stock moves toward one of the strike prices – and especially if some time has passed, instead of facing a loss as the iron condor trader would be facing, there's a good chance that the diagonal spread could be closed profitably.  Whether that comes to pass is going to depend on how much time remains before the front-month option expires, and the current implied volatility of the calls you own.

2. If closing doesn't appeal, and you prefer to hold this position, selling the calendar spread when it is nicely priced (the stock trading near the strike price increases the value of a calendar spread) allows you to take cash out of the trade.  In the GOOG example, you sell your GOOG Oct 480 calls and replace them with Sep 480 calls.  That's selling changes the position from a DD to a combination spread.  It's half an iron condor on the call side and remains a diagonal on the put side.

If the position soon becomes risky to hold, you can use some of that newly- collected cash to pay for an adjustment.  Alternatively, you may elect to exit.

3. If enough time passes and if the underlying moves far enough away from one of the strike prices, you may be given the opportunity to repurchase one of the options you sold at a very low price.  Looking at that GOOG spread again, if the GOOG SEP 470 calls are available, you may decide to cover them by paying $0.20.

When you do that you have two good choices.  The first is to sell the Oct 480 calls, closing half the DD and probably earning a decent profit.  The second choice is to sell the Oct 470 call spread, converting the call portion into half of an October iron condor.

Deciding which is better is going to depend on the price you can collect for the Oct 470 call and how attractive it looks to own that specific GOOG Oct call spread.  Do not make this trade unless you want to own the position.  There's nothing wrong with exiting the trade.

The possibility  described above was discussed in the comments to Part I.

4) If IV explodes higher and if your underlying has not moved so far that your position is endangered, you can collect on that IV surge by selling two calendar spreads and converting the DD (which you want to own when IV is low) into an iron condor (which you prefer when IV is high – because it's too costly to buy the vega-rich DD spreads).  Of course, if it's attractive to do so, you may choose to exit the DD instead, and pocket the profit.

The new IC may run into trouble in the volatile market, but selling the two calendar spreads allowed you you own this position at a very favorable price.

Double diagonal spreads are more flexible than iron condors, but they are rich in vega and you want to own them only when you believe IV will be increasing – or at least not decreasing.  If IV feels too low to be trading iron condors, you may decide to compromise and own both iron condors and DD spreads.  Or you can open the combo spreads: Half an iron condor on the call side and a DD on the put side [or vice versa, but a downward move which hurts the put side of the IC may not be hurt as badly when you own the extra vega that comes with the diagonal].


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Trading Double Diagonal Spreads. Part I

Hat tip to jcvictory for suggesting this discussion.

Double diagonal spreads and iron condors are cousins.  The relationship is not one of 'blood,' but they are related through the marriage of iron condors with calendar spreads.

If you are not familiar with these option strategies, use the above links for an introduction to each.


When trading IC the trader usually has a good method in place for deciding when to exit a profitable position.  He/she may have a specific price that is willingly paid, and that price may vary with the number of days remaining before the options expire.

The plan may be to hold through expiration.

Some traders buy in the position when a specific percentage of the maximum profit has been earned (roughly 80+%).  That's similar to the first method, but the price paid is a function of the original premium collected, and not time remaining.

I've discussed adjusting an iron condor trades gone awry many times and offered several risk-reducing (this link is to one idea) approaches for you to consider.  Today I'll discuss happier times – profitable times.

When trading diagonal spreads (or double diagonals), the 'close for a profit' decision is much more complex.  Why?  When the iron condor has reached a price of $0.15, there's only that $0.15 left to be made.  There's not too much to be earned from holding and each trader can decide whether holding or closing is best.  It's not a big deal, although I am a big fan of closing early because there is so little to gain and so much to lose.

When trading the diagonal, the major difference is that you are short the front-month option and own an option with a more distant expiration date – most often one month later.  Thus, as your short option moves towards zero, you don't want to hold 'too long' because the value of your long option must be protected.  The cash you collect when selling your long options plays a huge role in determining the overall profitability of the diagonal spread (single or double).

Time decay is generally positive (profitable) for the diagonal spread owner, but there is some compromise point at which it's no longer a good idea to own the position because the time decay collected by remaining short the front month option is readily offset by several factors:

Time decay of the long option: At some point your long begins to decay as rapidly as your short.

Vega risk:  If IV is declining, as it has been in recent times, then the longer you own the position, the less you can collect when selling your longs. Holding longer is a wager that IV will soon increase.

Delta risk: If the underlying stock or index moves so that your options are farther out of the money (we are only discussing one half of the double diagonal spreads; not both sides simultaneously), as soon as the delta of your long exceeds the delta of your short, your spread declines in value – and a portion (all?) of your profits can disappear.  When looking at a call spread, it's bad enough to lose money when the stock surges through the strike price of your short options, but you don't want to see your profits disappear when the stock declines. At some point, it a good idea to close the trade and keep what you have earned.  Remember, profits that are in your account today represent your money.

The objective is to exit the trade when you can still collect enough from your long option to provide a decent profit. This is not a consideration when trading iron condors (because your long is always worth less than your short). I can suggest no cast-in-stone rules to guide you.  As with many decisions that must be made when trading options, your comfort zone limitations and profit requirements can best be determined by the individual investor.

Next time I'll take a closer look at some items to think about when it's time to take the money.

to be continued


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