Double Diagonal Options Strategy — Step-by-Step Guide & Transcript

[00:01] strategy for beginners? Well, it's definitely not chasing overpriced calls and puts on hot stocks where your chances of winning the trade are far worse than you actually think. In fact, that's a great way to lose money trading

[00:14] options. But we'd rather find a winning strategy that involves following a simple set of criteria for trade entry and a simple and repeatable set of rules to implement that strategy. then and only then can it be considered to be a

[00:28] solid strategy that's profitable and suitable for traders of all levels. I've that you can learn and apply to your own trading. And today I want to challenge you to follow this step-by-step strategy

[00:42] lesson closely. And if you do that, if you stay with me on this, by the end of the video, you will have learned one of the most solid and respected options trading strategies out there, the double diagonal option strategy. that is traded

[00:56] by professional options traders all over the world. Now, in this video, we're going to be learning three key criteria for you to use as your strategy checklist. Then, we're going to teach you the easy repeatable process for how

[01:10] to implement the trade once your criteria are met. And then, we'll show you a full 12-month example of how this strategy performed last year, so you can see how powerful it is. So, let's go ahead and dive in.

[01:25] ahead and dive in. >> [music]

[01:45] process is to find a stock, an ETF or an index which has a very flat price chart. So let's for example take TLT, the EyesShares long treasury bond ETF that holds 20 to 30year Treasury bonds. And so let's say that on the first day of

[02:01] January in 2025, we had looked at this chart and we would have noticed that the index had actually been trading at a pretty tight range for the last few years, hitting as low as 82 and as high as 109, but spending most of its time in

[02:16] that 87 to 100 range for the previous two years, closing at 8757 on the first trading day of January. And so we'd call this a pretty flat chart. we can move on

[02:28] to step two, which is to check as to whether this options chain has at least monthly expirations. You see, most stocks, ETFs, and indexes actually have options chains expiring weekly, but on the other hand, some options chains only

[02:44] have quarterly options, and that's not going to work for this strategy. So, pull up your online broker platform like we're showing you here and just make sure that there is at least one expiration in each month of the upcoming

[02:56] year. And as you can see, TLT does in fact have at least one expiration in every month of the upcoming year. So, we can check that off the list. And then the final prerequisite is step three in which we ensure that the individual

[03:10] strike prices have tight bid spreads which basically means that you'll be able to get a fair and competitive price for the options that you'll be trading. And so looking at this options chain of TLT, we can see that the bid ass spreads

[03:25] are very tight, usually one to three cents in width. And that's a very tight liquid options chain and perfect for this strategy. So, at this point, we've checked off all three boxes, and we're ready to go because TLT meets all of our

[03:40] criteria. Let's head back to the third Friday in January 2025, which was January 17th. And incidentally, we picked the third Friday of the month because options chains that have monthly options will always have an option chain

[03:55] expiring on the third Friday of the month. So, it's a very convenient day to start trades where you'll be in the trade for about a month. And this strategy that we're sharing with you today is traded 12 times a year, once a

[04:08] month, starting on the third Friday of the month. So, as you can see on that the month. So, as you can see on that day, the stock had closed at 8719. options chain expiring on the third Friday of that next month, February

[04:21] 21st. And as you can see, there's a column on that options chain called delta. And as you move up the options chain, you'll see the first option you chain, you'll see the first option you hit that has a delta below 20 is the 91

[04:33] 18.23, as you can see. And then if you move down the put side on that delta column, you'll see the first option that has a delta below 20 on the put side is that 83 put. So, we're going to go ahead and

[04:48] 83 put. So, we're going to go ahead and sell 10 each of both the 91 calls and the 83 puts. Before we go any further, you might be wondering why we picked those below 20 delta call and put options to sell. And that's very

[05:01] important. So, we're going to take a minute on this before we go on. You see, the delta of an option is a mathematically arrived at prediction of how much an options price is likely to move based upon how much the options

[05:13] index itself moves. And while it's a little bit of an involved topic, suffice it to say that an options delta has also been found to be highly correlated to the probability that an option will expire with value on the day that it

[05:29] expires. And so, for instance, in the case of a 20 delta call option, there's approximately a 20% chance that the stock will close above that call option strike price on the day that the call expires. And so if you think about it,

[05:43] it also means that there's an 80% chance of the stock closing below that call strike price on expiration day. And when does a call option have value in expiration? That happens only if the stock closes above that call strike

[05:58] price on the day it expires. Because at that point, you'd have the right to own the shares at a price cheaper than you get them in the open market. So that option has a lot of value obviously. And the exact same thing is true for the 20

[06:11] delta put except to the downside. And so the options market is saying that there's a 20% chance that the stock will close below the put strike price or in this case 83 and therefore an 80% chance that it won't expire below that price.

[06:28] And [snorts] so what we're trying to do here is to sell options all of which have less of a likelihood of expiring with value than with no value. Now, why want to sell options and then have them go to zero? Well, as you'll find out in

[06:44] outcome, even though it doesn't sound like that initially. So, stick with me and you'll see. The second step before we launch the trade is to head over to the options chain, which expires about two months out. in this case, March

[06:59] 21st, uh, about two months later. And we're going to go ahead and buy 10 of those 96 calls, five points higher than the 91 calls we sold. And we're also going to go down to the 78 puts and buy 10 of those, five points lower than the

[07:16] 83 puts that we sold. And so, we've sold two sets of options in the February options chain. And we bought two sets of options in the March options chain. And so when we do this, selling calls and puts above and below where the stock is

[07:30] puts above and below where the stock is trading and buying farther out calls and puts at an equal distance from the options we sold. When we do that, we have created what options traders refer to as a double diagonal options trade,

[07:44] which is a great strategy for trading flat price charts like we found with TLT. Now, before we take a look at the trade outcome, let's first dig into the positive cash flow we received when we first entered the double diagonal.

[07:59] Starting with the 91 calls that we sold, we received a price of 36 cents for those. But remember, each option uh represents 100 shares of stock. So, we multiply that by 100. And since we sold 10 of them, when you multiply it all

[08:13] 10 of them, when you multiply it all together, we ended up receiving $360 for the 91 calls. Using that same kind of math, we paid $240 for the 96 calls that we bought, those March calls, and we received $340 for the 83 puts we

[08:29] sold. And finally, we paid 220 for the 78 puts that we bought. And netting it 78 puts that we bought. And netting it all down, we received $240 of cash from all down, we received $240 of cash from this double diagonal trade. And to enter

[08:43] your broker is going to require you to have $4,760 in your account to make this trade, which is also the trade's worst case scenario. Let's move to the expiration day of this trade, which is February

[08:56] 21st. And as you can see, TLT closed at 8961 that day. Well, if you'll recall, we sold the 91 calls and the 83 puts. Both of those expired that day while the long options in March are still alive.

[09:11] Since the 91 calls are above where the stock closed and the 83 puts are below where the stock closed, both options actually expire worthless because puts below their strike price and calls only have value if the stock closes above

[09:26] their strike price. And if you think about it, we shouldn't be too surprised about this because both the calls and the puts had less than a 20% chance of expiring with any value in the first place. This is because we picked options

[09:41] with deltas lower than 20 as we explained earlier. So both of those explained earlier. So both of those options expire worthless. But, and this is key to understand, the 96 calls we bought in March and the 78 puts we

[09:55] bought in March and the 78 puts we bought in March both have value still. Why? Well, those have 28 more days before they expire. So, there's a possibility that TLT will rally up to 96 or sell off down to 78 and those options

[10:09] have to retain some value because that risk is still a possibility. And the one selling those options has to get paid for that risk. And as you can see, the 96 calls are worth 11 cents and the 78 calls are worth about 1 cent. So when we

[10:25] close the trade, we're going to get some value from those. And so when we calculate the profit from this trade, we'll start with that initial $240 that we received when we first entered the trade, then we'll acknowledge that both

[10:38] the 91 calls and the 83 puts that we sold in February, they both expired worthless as we talked about. And if on the day those expire, we also sold the two remaining long options that expire in March, the 96 calls and the 78 puts.

[10:54] As you can see, we received $110 for the 96 calls. And we received $10 for the 78 puts, resulting in a final trade profit of $360.

[11:06] sense that we would have picked a price chart of a stock that wasn't moving a lot because then if we kind of surround it with short calls and short puts and the stock's price stays inside of a reasonable range, then there's a good

[11:20] placed above the market and the short puts placed below the market will both expire worthless and we'll still be able to collect cash for selling off the long options resulting in an overall profit. And that's the basic concept behind a

[11:35] double diagonal. So with systems like this, a best practice is to repeat the trade month after month as these are annual campaigns and you like to look at the profit and loss from all the trades in the campaign on an annual basis to

[11:50] get a sense of the edge of the strategy. So let's move to the next trade which will start immediately at the expiration of the previous trade. And so in this case, we'll be selling the 93 calls with a delta of 1836 and the 86 puts with a

[12:06] delta of 1339. And again, in both cases, we're taking the closest options, which have a delta of no higher than 20 on both the call and the put side and selling those, hoping they both expire worthless. And then we're going out to

[12:20] the April expiration and buying the 98 calls, five points above the 93 shorts. And we're also buying the 81 puts five points below the 86 shorts. So again, as you can see, we have set up another double diagonal that we will be closing

[12:35] on March 21st. And again, using that exact same kind of calculation, you can see we collected a total of $250 this time, similar to the cash flow we got for the last double diagonal. In this case, our broker will require 4750 in

[12:51] capital. If we move to March 21st when the short options in this double diagonal expire, you'll see that TLT closed at 9070 that day. So again, just like last time, both the short calls up at 93 and the short puts at 86 both

[13:07] expired worthless because TLT's price expired between the strike prices of the short puts and the short calls, just like last time. And when we look at the surviving long calls up at 98 and the long puts down at 81, again they expire

[13:22] with a little bit of value with the 98 calls priced at 10 and the 81 puts priced at 2. So when we do that same kind of calculation, as you can see, we kind of calculation, as you can see, we made a profit in this case of $370.

[13:37] start keeping a scorecard of how this year goes. So you can see that we And now we're ready to move on to the April trade. Now with the April trade, we're going to be short the 94 calls and the 88 puts. And we'll be long the May

[13:53] 99 calls and 83 puts. And in this case, we collected $280 of positive cash flow at the outset of the trade for which your broker will require $4,720

[14:05] in capital for the trade to be entered. Something interesting happened on this trade because if we move ahead to expiration on April 17th, you'll notice the TLT closed at 8753 which is actually below the puts that we

[14:20] sold at 80 at 88. And so when this happens, the correct protocol is to close that option before it expires so that you do not get assigned the TLT shares. So now in this case, one of our two options, namely the put option did

[14:35] not expire worthless. instead we had to buy it back first. You can see 47. So that's going to be a cost to us. But on the other hand, take a look at how much we'll receive when we sell those 88 puts that we own in May. Those are priced at

[14:51] 47 cents also, which is a much higher than usual price for those longs. So let's now analyze the result of the trade. As you can see, it's different than the prior two times for two reasons. You see, while the call expired

[15:05] reasons. You see, while the call expired worthless as usual, the puts cost us $470 to close. And while the long calls were still worth 60 when we sold them, the long puts had blown up in value and are now worth $470.

[15:21] And so even though we took a loss on our short put, we made a really nice profit on our longp put, resulting in the overall trade result being a positive overall trade result being a positive $340 despite the fact that the TLT range

[15:34] was broken a little bit to the downside. So as you can see, this is a very forgiving trade with multiple ways to win. And so we'll add this trade to our scorecard as well. As it turns out, that April trade was the only trade during

[15:48] the 12-month period where one of the short options didn't expire worthless. And so, to avoid being repetitive, we're just going to show you the results of can check it for yourself if you have back testing software. And as you can

[16:02] see, after that April trade, in every subsequent month, TLT finished between the short calls and the short puts. So they went out worthless in each remaining case. While we got some extra profit from selling off those long calls

[16:16] and puts in the next month in each case, resulting in an annual profit of $3,645, resulting in an annual profit of $3,645, which is a return of 77.5% for the 12-month period. And while this is not going to be the case in other

[16:32] years, there's definitely going to be years with losses. Nonetheless, the logic behind the strategy is strong, which is how we can get such an extraordinary return like we did in 2025. And so, what I'd like you to take

[16:45] away from today's video is that trading double diagonals can be a very strong trading practice as you gain experience if you follow the three important criteria we laid out for you in the beginning of the video, never skipping

[17:00] any of them. Now, the most challenging aspect will be to find a flat price chart like TLT. And if you can find a stock or ETF or index that's showing that kind of flat price pattern, the double diagonal can be a potentially

[17:13] rewarding trade for disciplined traders. Now, if you'd like to learn three more option strategies that our prot traders use, including the unique options trick that allows you to make money while you wait to buy stocks or ETFs at the price

[17:28] you want, and the options income strategy that allows you to make consistent money whether the market goes up or down or sideways, and how to make money on a stock or index trade, even if you're wrong on the direction, then

[17:44] click the link that's appearing ing right now at the top right hand corner of your screen. That will open up the free workshop registration page in a new window. So don't worry, you won't lose this video. Or you can register directly

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