ADD A LIT TLE VEGA
Remember some hard facts about vega. First,
it’s highest for at-the-money (ATM) strikes,
and gets progressively lower as a strike moves
further O TM. Second, it’s higher when an
option has more time to expiration, all else
being equal. With an iron condor, the short
options are closer to the money and have
higher vega than the further OTM long
options. So, the iron condor is net short vega.
With the double diagonal, even though long
options are further OTM than short options,
they can have higher vega because they have
more time to expiration.
You can visualize vega
at different strikes for
multiple expirations on the
thinkorswim® platform from
TD Ameritrade. On the
Trade page, go to the
Product Depth section near
the bottom. Select vega from the dropdown
menu, then choose two expirations from the
“Series” dropdown menu. In Figure 3, the
magenta line shows the vega of O TM options
with 60 DTE, and the yellow line shows the
vega of O TM options with 30 D TE.
Really, a double diagonal is an iron condor,
plus a put calendar and a call calendar.
• Start with a 37/38/42/43 iron condor,
which is long the 37 put, short the 38 put,
short the 42 call, and long the 43 call with
37 put calendar
that’s short a 37
put with 30 DTE,
and long the 37 put
with 60 DTE.
• Add a long 43
call calendar that’s
short the 43 call
with 30 DTE, and
long the 43 call with
The long 37
puts with 30 DTE
of the iron condor
are offset by the
short 37 puts with
30 DTE of the put
while the long 43
calls with 30 DTE
are offset by the
short 43 calls with
30 DTE of the call
Keep in mind that
have positive vega. Adding them to a negative
iron condor can create a positive-vega double
diagonal. The level of a double diagonal’s pos-
itive vega depends on which strikes you select
for long options. If long options are closer to
the money, like the 37 puts and 43 calls are in
this example, it could have a higher vega than
if the long options are further O TM, such as
the 35 puts and 45 calls. If the long options are
far OTM, they could have lower vega than the
short options, and give the double diagonal
You can use the Analyze page on the
thinkorswim platform to see if a prospective
double diagonal has positive vega, and even
test how that vega changes as you use different strikes (Figure 4).
Strike selection in double diagonals also
determines position risk. The wider the
distance between the strikes of the short and
long options, the larger the risk. That’s the
same as with an iron condor.
When vol is low, consider the double diagonal’s long vega strategy. If you think implied
vols might go higher, but you still like the
market-neutral, positive-theta, defined-risk
strategy, the double diagonal could be a suitable alternative.
ROLL WITH IT
Double diagonals have another unique fea-
ture: opportunities to get credits from rolls.
Think of it as the gravy with your tasty meat
and potatoes. Because a double diagonal’s
long options are in a further expiration than
the short options, you can try to roll the short
options to a further expiration and collect a
credit. As long as the short options you roll to
don’t expire after the long options, you can
keep a double diagonal alive long after an iron
Just like rolling the short option of a long
calendar spread, the credits received through
rolling a double diagonal’s short options can
reduce the risk of the position while potentially increasing its profit. Given the available
stocks and indices with weekly options, this
increases the number of possible rolls.
For example, if you paid $0.30 debit for
that XYZ double diagonal, the max risk is
$130. But if you roll the short 38 put and 42
call to a further expiration and collect $0.30
in credit, you’ve reduced the double diagonal’s risk to $100. If you can roll them again
for, say, $0.40, you’ve reduced the risk down
to $60. The last action is rolling the short options to the expiration of the long options, and
you have—drum roll, please—the iron condor.
The total roll credit on the double diagonal is
the total for the resulting iron condor. Ideally,
those rolling credits are higher than what
you’d get from selling the iron condor in the
Credits earned for rolls depend on where
the stock price is at the time of the roll, as well
as implied vol. When implied vol is higher,
credits can be higher, too. So, if you think
implied vols will rise, you could potentially
collect more. That’s an additional benefit to a
double diagonal’s long vega.
Keep in mind that rolls will increase commission costs, which means the double-diag-onal strategy may carry more commissions
than the iron condor.
FILL UP ON STRATEGY
Don’t go hungry when vol is low. And don’t
toss out your market-neutral, positive-theta,
defined-risk style for potentially riskier directional trades. Consider double diagonals
as an alternative to iron condors in low-vol
market conditions. Then buy a stationary
bike and snack to your heart’s content.
Thomas Preston is not a representative of
TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the
author and may not be reflective of those held by
TD Ameritrade, Inc.
For more on the risks of trading and trading
options, see page 37, #1– 2.
FIGURE 3: Visualize vega. When there are more days to expiration, vega is higher.
Source: thinkorswim from TD Ameritrade. For illustrative purposes only.
FIGURE 4: Explore the double diagonal. Put in your simulated trades and see if
vega is positive. Change the strike prices and see how vega changes. Source: thinkorswim
from TD Ameritrade. For illustrative purposes only.