Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Playing Google: Iron Condors Versus Double Diagonals


Both are directionally neutral, but time horizons are different.


On OptionSmith, I last placed a trade in Google (GOOG) ahead of its earnings report, in which an iron condor was sold with the expectation that the stock would maintain a range between $420 to $450 a share.

The trade worked well, but Minyan Ron, in a proper quest for knowledge, asked, "Why do you prefer to do short iron condor over buy double diagonal on this earning play? Seems to me, with the crushing of front-month IV after earning, double diagonal would benefit more than the current short vega of the condor position."

First let's define the 2 different positions. An iron condor is essentially 2 vertical spreads -- a put spread and call -- both sold for a credit. Another way to view the condor is the sale of a strangle and the purchase of a further out-of-the-money strangle. The profit is limited to the amount of premium collected while the risk is limited to the width between strikes minus the premium collected.

A double diagonal is the sale of a near-month strangle simultaneous with the purchase of a strangle in the next available month, with the closest strike in the same underlying. This essentially creates 2 calendar spreads. The big difference is the double diagonal is often done for only a small credit or possibly a debit.

A quick look at some numbers: In the iron condor sold for the earnings play, I collected $5 of total premium, which would be realized if shares stayed between $420 and $450 following the earnings report. They did, and the trade was profitable as all the July options expired worthless.

If I'd set up a double diagonal using similar strikes, the position would have cost about a $10 net debit. The long August strangle I'd be left holding is currently valued at around $13.50, meaning there's currently a $3.50 profit. Not only is this some 30% less than the condor delivered, but now theta, or time decay, is drastically against me. I'd need a substantial price move in over the next month, and with earnings in the rear-view mirror, there are no apparent catalysts.

< Previous
Position in JNPR.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos