This more advanced article on Double Diagonals is a follow-up to an article covering the basics of Double Diagonals from last year.
In order to properly explain the topic of Advanced Double Diagonals, an example of a live trade will be utilized. The trade was entered on Thursday 4/19/2012 while the XEO (S&P 100 cash-settled index) was trading at $629.59 with the following goals; the first goal was to pay off some of the initial debit of placing the Double Diagonal with the sale of weekly options, and the second goal was to end up with some profit. Specifically, the goal was to accumulate at least ten percent on the trade. For the sake of simplicity, this article will present a single spread. Figure 1 lists the long legs which were bought on the regular monthly options.
Contract specifications
Premiums
BTO + 1 May 650 call
1.90
BTO + 1 May 615 put
7.70
Total debit
9.60
(Figure 1)
As stated above, the XEO at the time (Thursday 4/19/2012) was trading at $629.59 and the purchase of both of the May legs were out-of-the-money (OTM), yet due to so many weeks out, the premium was expensive. None of the premium value of the May 615 put or May 650 call was due to the intrinsic value. Knowing this fact, one might wonder then, why would those OTM legs be purchased at all, at such a high cost of nearly $1,000… Continue Reading
