Saturday, January 5, 2013

Comparison of double diagonal spread and double calendar spread

In order to analyze adjustment strategies for my market neutral portfolio, I revisited the double diagonal spread which favors up-trending market when compared to double calendars. This time, I analyzed the out-of-the-money spreads with TOS analyzer and would like to document it and share with other option strategy players.

In a nutshell, double diagonal spreads when compared with double calendars of similar strikes and short option month, have the following characteristics:
  1. Lower sensitivity (Vega) to implied volatility (10% lower in the example)
  2. Faster time decay
  3. Lower Delta which makes it less susceptible for directional changes
  4. Higher profit potential (7% higher in the example), but less ROR
  5. High margins vs no margins for DC
The margin requirement for double diagonal is the initial debit plus the strike differences at the call side and at the put side.

The DD and DC has very similar break-even points and probability of success in the analyzed trades as shown in my document here which includes P&L graphs under different scenarios (time and volatility changes) for both strategies. As the position size increases, DD will show substantially more Vega benefits in IV falling markets.

Note the DD also allows more complex-ed adjustment strategies of its own with option rolling.

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