Double Diagonal
A Double Diagonal is a neutral, time-decay-harvesting options strategy that combines two diagonal spreads — one with calls and one with puts — at different strikes and expirations, profiting from the faster decay of the short near-term options versus the slower decay of the long far-term options.
A Double Diagonal is constructed by selling a near-term out-of-the-money call and a near-term out-of-the-money put (creating a short strangle in the near expiration) while simultaneously buying a farther-term out-of-the-money call and a farther-term out-of-the-money put at the same or slightly different strikes (creating a long strangle in the back expiration).
The key feature is that the long options in the back month act as protection for the short options in the front month, while the time decay differential between the two expirations creates income. Because the near-term options decay faster than the back-month options, the position benefits from theta as long as the underlying remains within the range defined by the short strikes.
A double diagonal differs from a double calendar spread in one important way: the strikes of the long options differ from the strikes of the short options. In a double calendar, all four legs share the same two strikes. In a double diagonal, the long options are at wider strikes — providing greater protection against large moves but also defining a different profit zone.
The ideal environment for a double diagonal is low-to-moderate realized volatility with elevated implied volatility. The short near-term options should decay quickly while the long back-month options retain their value as a protective hedge. If the underlying makes a large move, the long options provide a buffer, though the position will still lose if the move is large enough to push the short options deep into the money.
Management involves rolling the front-month short options each cycle as they expire, collecting fresh premium while maintaining the back-month long options as the protective skeleton. Over multiple cycles, the premium collected from rolling the short options can exceed the initial debit paid for the long options, leading to a profitable cumulative outcome.
The double diagonal is a more complex but capital-efficient alternative to an iron condor, offering better protection against gap moves in either direction thanks to the long back-month options, which have higher gamma and can appreciate rapidly in response to a volatility spike.