Beginner's Guide to Double Diagonals and Double Calendars
A Beginner's Guide to Double Diagonals and Double Calendars
Introduction
Options trading can be a complex but potentially rewarding strategy for investors looking to enhance their portfolio performance. In this guide, we'll explore two advanced options strategies: double diagonals and double calendars. We'll also compare these strategies to similar ETFs like QYLD, RYLG, JEPI, and JEPQ.
Similar ETF’s, however, generally only take one side of the market, for example, a covered call ETF. Few, if any, offer long theta on both sides of a market move. In other words, there are not many “delta neutral” ETF’s. For this reason, a strategically placed double diagonal or double calendar can profit more than a similar ETF.
Double Diagonals
Before we get started, we should talk a little about the two trades we make. The first is a double diagonal is an options strategy that involves simultaneously entering two diagonal spreads - one bullish and one bearish.
Key Components:
Long-term options (further expiration)
Short-term options (nearer expiration)
Different strike prices
How it works:
Buy a long-term out-of-the-money (OTM) call and put
Sell a short-term OTM call and put
Benefits:
Potential to profit from time decay
Limited risk
Opportunity to benefit from volatility changes
Double Calendars
A double calendar spread is similar to a double diagonal but uses the same strike prices for both long and short options. This may be a better trade for those with a small account or do not want the risk of a wider strike on the long call and put.
Key Components:
Long-term options (further expiration)
Short-term options (nearer expiration)
Same strike prices
How it works:
Buy a long-term call and put at the same strike price
Sell a short-term call and put at the same strike price (matching the long options)
Benefits:
Capitalizes on time decay
Defined risk
Potential to profit from volatility increases
Why These Strategies Can Be Beneficial
Flexibility: These strategies can be adjusted based on market conditions.
Multiple profit opportunities: They can profit from time decay, volatility changes, and directional moves.
Defined risk: The maximum loss is typically limited to the net premium paid.
Potential for higher returns: When managed properly, these strategies can offer higher returns compared to simple buy-and-hold strategies.
Comparison to Similar ETFs
Let's compare these strategies to some popular income-focused ETFs:
QYLD (Global X NASDAQ 100 Covered Call ETF)
Strategy: Writes covered calls on the NASDAQ-100 Index
Yield: High (often 10%+)
Risk: Moderate (limited upside potential)
RYLG (Global X Russell 2000 Covered Call & Growth ETF)
Strategy: Partially covered call strategy on the Russell 2000 Index
Yield: Moderate
Risk: Moderate (some upside potential retained)
JEPI (JPMorgan Equity Premium Income ETF)
Strategy: Combination of S&P 500 stocks and ELNs (Equity-Linked Notes)
Yield: Moderate to High
Risk: Lower than QYLD, with some upside potential
JEPQ (JPMorgan Nasdaq Equity Premium Income ETF)
Strategy: Similar to JEPI, but focused on NASDAQ-100 stocks
Yield: Moderate to High
Risk: Moderate, with some upside potential
Potential Advantages of Double Diagonals/Calendars over ETFs
Customization: Traders can tailor their positions to their specific market outlook.
Higher profit potential: In ideal conditions, these strategies can outperform the ETFs.
Flexibility to adjust: Traders can modify their positions as market conditions change.
Potential for both income and capital appreciation: Unlike some ETFs that focus primarily on income, these strategies can benefit from price movements as well.
Risk Mitigation
While double diagonals and double calendars can offer superior returns, they also come with increased complexity and potential risks:
Requires active management: Unlike ETFs, these strategies need constant monitoring and adjustment.
Higher learning curve: Traders need to understand options mechanics thoroughly.
Potential for larger losses if not managed properly: Improper risk management can lead to significant losses.
The whole point of this newsletter is to improve our chances; understand the risks; and not ‘stress out’ when the underlying stock moves against us. Please consider subscribing to our free newsletter to learn more. In the future, we plan on offering a premium subscription so you can follow along with our trades; learn some key secrets; and improve your trading regardless of your prior trading.
Conclusion
Double diagonals and double calendars offer sophisticated traders the potential for enhanced returns and greater flexibility compared to similar ETFs. However, they require more active management and a deeper understanding of options trading.
Remember, trading involves risk. So does life. The Options Clearing Council “Characteristics and Risks of Standardized Options” is a good place to start. Additionally, we seek to educate you. Your decisions are your own. Please do your own due diligence and understand what risks you are taking. In life too!
