In this tutorial, we are going to look into a mild variation of Double Diagonal Spread to take a neutral to the bullish view. Double Diagonal Spread is a 4 legged option strategy and nothing but a combination of bull call diagonal spreads and bear put diagonal spreads which is more of a neutral approach towards trading.
Let see how we can take a mild bullish bias with a slight variation in Double Diagonal Spreads.
Let’s get some primer on Diagonal Spreads and Calendar Spreads before jumping into the actual trading strategy example
A calendar spread is a strategy involving buying longer-term options and selling an equal number of shorter-term options of the same underlying stock or index with the same strike price
A Diagonal spread is a strategy involving buying longer-term options and selling an equal number of shorter-term options of the same underlying stock or index with the different strike price
A Double Diagonal Spread is a neutral approach combining two strategies Bull Call Diagonal Spread + Bear Put Diagonal Spread and here is the sample payoff graph. It can also be viewed as short strangle in a short month options contract (For example . current month contract) hedged with long strangle on both sides in the long month options contract (for example next month contract.)
Double Diagonal Spread Payoff Graph
Now to take a mild bullish approach at the same time hedging the positions on both sides, one can consider going for a Bull Call Calendar Spread + Bear Put Diagonal Spread for the increased width in the profitability spread as shown below
Modified Double Diagonal Spread Payoff
The strategy is composed of 4 legged strategies with a holding period till current month expiry hedged with next month-long options on both the sides as shown below
Sell 11200 Puts – Jul 2020 Contract at Rs173/lot
Sell 11500 Calls – Jul 2020 Contract at Rs 27.05/lot
Long 11100 Put – Aug 2020 Contract at Rs 299/lot
Long 11500 Call – Aug 2020 Contract at Rs 158.90/lot
Lower Breakeven Levels – 11045
Upper Breakeven Levels – 11723
Risk: Downside risk and Upside risk protected on both sides
The strategy is built to manage up to 680 point range ie 11045 – 11723 levels
Exit one-sided spreads on Trigger of Stops to reduce the risk further.
Nifty Index Downside stop-loss for Exiting Bear Put Diagonal Spread: 10950
Nifty Index Upside stop-loss for exiting Bull Call Calendar Spread: 10750
Margin Required : Rs 47904/- (approx)
What if Analysis for holding the spread till July 2020 Expiry
|Nifty Index||Expiry Day||Profit/Loss in Rupees per set|