A double diagonal trade is a neutral trade, with a small chance for profit and an equivalent small chance for loss. If you’re familiar with options trades, the double diagonal is similar to a Butterfly spread except of that it is diagonal. The most challenging aspect of the trade is finding a good discount broker, since the trade requires four distinct transactions.
Define a put option.
A put is an option, but not the obligation, to sell a stock at a particular price in the future. This is purchased by a bearish or pessimistic investor.
Define a call option.
A call is the option, but not the obligation, to buy a stock at a particular price in the future. This is purchased by a bullish or optimistic investor.
Define strike price.
The strike price is the price you set your bet. It is the break-point in the future at which your options will begin to hold value.
Define at-the-money.
An option is at-the-money (ATM) at the point in which it holds value (excluding commissions). The ATM strike price refers to the option which is most recently profitable. It is just above (call) or below (put) the current price of the stock.
Chart out the payment stream for a double diagonal option.
The first trades are for calls. You want to sell calls slightly above the current stock price (or ATM strike price) near expiration, and buy call options just slightly above that current stock price using the next expiration month.
Chart out the puts.
Sell puts slightly below the current stock price near expiration (or ATM strike price), and buy put options just slightly below that price using the next expiration month.
Expect a higher commission expense.
This trade will incur four trade commissions, therefore, it is necessary to use the lowest commission discount in order for the trade to remain profitable.