Double Diagonals

S

SPARKY911

does anyone trade double diagonal spreads for weekly income?
BTO JUL565 call @45.90
STO DEC13 565call @ 5.10
STO DEC13 555put @ 4.90
BTO JUL 555 put @49.35
initial investment of $8525.....stock price at the end of every week cannot be where the short calls and puts are...one will expire worthless...the other covered by the long position or STC position
-theta benefits short seller
-doesnt matter if stock goes up, down or sideways
-31 weeks until jul 19 exp X minimum of $275 weekly to break-even
-31 weeks until jul 19 exp X conservative $550 weekly for 100% return
 
DDs can be profitable but it does matter if it trends strongly up or down .......then you will have to take on some risk on the opposite side to generate much income. You basically want the underlying to be range bound. Thhe weeklies drop off n value quickly on the ends.
 
Why would I use options expiring 6 months from now ( JUL) to hedge weeklies expiring in a few days ( DEC13) ?

I am not sure how this trade was framed, did it come from some automated query?

And, why is your first ever post a trade recommendation? Troll Alert!!
 
Quote from SPARKY911:

does anyone trade double diagonal spreads for weekly income?
BTO JUL565 call @45.90
STO DEC13 565call @ 5.10
STO DEC13 555put @ 4.90
BTO JUL 555 put @49.35
initial investment of $8525.....stock price at the end of every week cannot be where the short calls and puts are...one will expire worthless...the other covered by the long position or STC position
-theta benefits short seller
-doesnt matter if stock goes up, down or sideways
-31 weeks until jul 19 exp X minimum of $275 weekly to break-even
-31 weeks until jul 19 exp X conservative $550 weekly for 100% return
More...

Those aren't diagonals. Those are two strangled time spreads. The call AND put spreads should be different strikes, i.e., a 560/570 Dec/Jul call and a 540/550 Dec/Jul put. Retail goes long the meat in the deferred and sells further OTM in the front month. Retail doesn't want the convergence risk (a la backspread) in shorting moneyness. The idea is to be symmetrical to gamma, but at the expense of v. They look great until you go outside the wing and then there are no expiration roll opportunities.

They work best on index mkts where you have a pronounced smile/term skew. You buy near-ATM in deferred and sell further out on the front month for skew. If you're tight on gamma you can essentially isolate to vola within the short strikes. You cannot un-f*ck it beyond either wing.

You're wrong on the stress-test.
 
Ugh, diagonals and calendars would be perfect if it wasnt for the erratic and flipping gamma closing into expiry or with price moving towards the wings. Say you want to isolate volatility with these (hedging gamma), what do when it gets closer to the wings? Give up?
 
diagonal as a trade is fine...just not as a "income" strategy. Your asking so much from a double diagonal over a period of 31 weeks you just won't have the juice week to week. In a period of low volatility they are pretty safe if kept on a shorter time frame and as Atticus mentions used on the indices. They can be good as an earnings play as well. "Income" strategies just don't work out as often described on paper. You don't "give up" if it hits the wings unless your opinion has changed on the underlying. If you have rolls left you roll and wait for it to come back. You can take on more risk if you want to by changing the strike...lots of ways to handle them, but very time and commission intensive.

Calendars the same, less risk, less reward. Most likely make a little after commission just seldom a home run.
 
Quote from TskTsk:

Ugh, diagonals and calendars would be perfect if it wasnt for the erratic and flipping gamma closing into expiry or with price moving towards the wings. Say you want to isolate volatility with these (hedging gamma), what do when it gets closer to the wings? Give up?
More...

You'd need to ratio and go further OTM (√time vega). Ppl tend to go very wide on durations so that they have many roll-events, but get caught outside the wings with major losses.
 
Quote from drownpruf:

Those aren't diagonals. Those are two strangled time spreads. The call AND put spreads should be different strikes, i.e., a 560/570 Dec/Jul call and a 540/550 Dec/Jul put. Retail goes long the meat in the deferred and sells further OTM in the front month. Retail doesn't want the convergence risk (a la backspread) in shorting moneyness. The idea is to be symmetrical to gamma, but at the expense of v. They look great until you go outside the wing and then there are no expiration roll opportunities.

They work best on index mkts where you have a pronounced smile/term skew. You buy near-ATM in deferred and sell further out on the front month for skew. If you're tight on gamma you can essentially isolate to vola within the short strikes. You cannot un-f*ck it beyond either wing.

You're wrong on the stress-test.
More...

It's a poor risk to go deep on duration with a diagonal. You're g/d exposure increases with only a small reduction in vega. Ideally you'd reduce gamma (same-strike spread). IOW, stick to standard calendars and go a bit further OTM. Hedge half your deltas is spot and stick to single spreads (don't strangle them).
 
Yes gamma is definitely a threat and constant rolling seems to be the only way to deal with it. Quite a pain in the ass I'd say. Also I'd assume you'd have to roll long before gamma flips around, to keep it safe. Then there's the vol factor. I dont remember the vega risk graph of these but maybe using short VIX to hedge vol could work? Ratio would be optimal but the margin is too much.
 
Atticus, if one wanted to make some theta on the S&P (ES FOPs) right now with the low vol, what diagonal/calendar structure would you recommend? I'm looking at the current weeklies (Dec 13) at 20 deltas (1825-1785) hedged with ~1-month forward (Jan 03) (no strangling so it's a calendar). They look tempting because of their theta/gamma ratios, but I'm sure there are other factors at play. Looking at the TOS risk graphs these calendar spreads are quite all over the place. Would you recommend deeper duration, more OTM/less OTM? I understand that you'd be looking for as high d/g ratio to vega as possible for the duration of the front-month...
 
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