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Playing Google: Iron Condors Versus Double Diagonals

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Both are directionally neutral, but time horizons are different.

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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.

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Position in JNPR.

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