Today, we are going to compare the double diagonal vs iron condor. Which is better? Which is more flexible?

Read on to find out….

**Contents**

The iron condor is the winner of the world’s most popular 4-legged option strategy.

The double diagonal is the winner of the world’s most flexible 4-legged option strategy.

How do they stack up against each other?

Which shall we crown as the best non-directional defined-risk strategy?

Let’s find out.

## Iron Condor Results

Previously, we gave some tips on how to set up iron condors and the various adjustments.

In a previous backtest, we had initiated iron condors on 50 underlyings with dates randomly picked from 2018 to mid-2021, ensuring that the date chosen was not during backwardation or close to earnings.

The iron condor results were:

**Win Rate:** 86%

**Average P&L per trade:** $300.73

**Average Days in trade:** 26

**Average Premium:** $994.68

**Average Max Risk:** $5435.32

**Average Risk/Reward ratio:** 5.4

**Average Return on risk:** 5.89%

**Average return on risk per day in trade:** 0.38%

**The Double Diagonals Setup**

We will manually backtest the double diagonal on the same underlyings on the same dates, following the setup and adjustments in The Ultimate Guide to Double Diagonals.

A good setup looks like this:

**Date:** Apr 14, 2021

Buy 10 Jun 18 AMAT $115 put @ $2.32

Sell 10 May 21 AMAT $120 put @ $2.12

Sell 10 May 21 AMAT $150 call @ $2.06

Buy 10 Jun 18 AMAT $155 call @ $2.62

**Debit:** –$770

**Max risk:** $5770

**Profit target:** $865

**Stop loss:** $1442

**Delta:** 17.47

**Theta:** 43.66

**Vega:** 68.60

The payoff diagram looks like that of an iron condor with the “cat ears” built-in.

See iron condor adjustment #3 here.

The tradeoff is that the profit plateau sags down in the middle.

One can bring the short strikes closer to raise up the sag a bit.

Like the iron condor’s cousin, the double diagonal starts fairly delta neutral and has positive theta time decay.

Unlike the iron condor, the double diagonal has a positive vega.

The max loss includes the risk of losing the entire debit we paid ($770) plus the loss of the width of the largest spread:

$770 + ($5 x 100 x 10) = $5770

We are taking profits if profits reach 15% of this initial max risk.

Our stop loss will be 25% of the max risk.

If neither of these is hit, we exit the trade with only seven days to expiration or 7 DTL (days to live).

However, the trader has the discretion to exit anytime within three weeks of expiration.

The short strikes are selected to be just inside of one standard deviation price move.

That essentially means the strike that is just higher than the 16 delta.

The front-month expiration is between 30 to 60 days. But you can go as short as 25 days if there are no monthly expirations within that range.

The expirations for the long calls and puts can be about one to two months further away than the shorts, as long as the price of the long is not more than 1.5 times the price of the shorts.

In this example, the price of Applied Materials (AMAT) long call is $2.62, which is not more than 1.5 times that of the price of the short call, which is $2.06.

Similarly, for the puts, $2.32/$2.12 = 1.1 is not more than 1.5.

Next, we check that the IV of the long call (39.82) minus the IV of the short call (41.31) is not more than 2, similarly, for the long put (IV=41.98) and the short put (43.76).

In this situation, the longs’ IV is lower than the shorts’ IV, which is even better.

This trade did not make it to its profit target.

But we decided to exit the trade at $280 profit since there were only 10 days till the front-month expiration.

## Double Diagonal Adjustment Choices

The double diagonal is very flexible.

One can move the short leg up and down and/or out in time.

Or one can move both the short and long up and down as a unit.

One can adjust the threatened side in a defensive adjustment or the untested side in an offensive adjustment.

Any such moves will cause changes in the shape of the payoff diagram, the max risk, the margin requirement, and the Greeks.

Any adjustment that decreases the magnitude of delta and yet increases theta is generally good.

Yet other times, one might need to sacrifice some theta to manage delta or vice versa.

Here are some trades where we rolled the short strike to the same strike as the long, converting one of the diagonals into a calendar.

It worked out okay for MDT.

The trade was terrible for FDX, and it was great for REGN.

A more complex adjustment involves converting one diagonal into a double calendar.

Adjustments are made when the price nears or touches the short strikes.

But sometimes adjustments are needed, even if prices are centered between the short strikes.

This is because as time gets closer to expiration and/or volatility drops, the short strikes may end up at less than 5 delta (so far out of the money that we are not collecting enough theta).

In this case, we would need to move the short and long strikes closer to the money.

## Smooth Going Double Diagonal Trades

Aside from stocks, we can trade double diagonals on ETFs such as on the Dow Jones ETF (DIA):

Without any need for adjustment, this trade reached the profit target of 15% return on risk in less than a month and with still 21 days till front-month expiration.

This trade is as good as it gets.

Other trades that we could close out profitably without adjustments are MCD, PEP, MA, NKE, LULU, and the index SPX.

But they all had to go much closer to the front-month expiration before these profits were made.

## Double Diagonals On Indices

Many will like to trade the double diagonal on indices because they can go all the way to expiration without the risk of assignment since indices are cashed settled.

Also, indices don’t have earnings which can cause large price moves.

Our backtest included SPX and RUT indices.

Because indices have many strikes, first determine the short strike by picking just one standard deviation.

For the long strike, keep scrolling out of the money in the option chain until you find one that doesn’t cost more than 1.5 times the short strike.

## Struggling Double Diagonals

The FB trade took a loss:

Other trades were not so easy as the price and P&L fluctuated too erratically.

The BLK trade was closed after we saw a positive P&L after too many adjustments.

SHOP had negative P&L most of the time, all the way up to 9 days before front-month expiration.

That’s when we closed it for a small loss instead of risking significant P&L changes near expiration.

## Double Diagonal For A Credit

While most double diagonal requires an initial debit, sometimes one can initiate a double diagonal with an initial credit, as in the cases here:

## Meeting The Criteria

We ended up with only 22 trades in this backtest because about half of them, we could not find a good setup that met the guidelines on the randomly selected date.

The long AAPL put that was one strike below the short put and one month further in expiration had a too expensive price.

Its price was more than 1.5 times that of the short put in the diagonal. Hence the trade did not meet the guideline criteria.

For COST, ISRG, GS, ALGN, etc., the long calls were more than 1.5 times the price of the short call, which did not meet the guidelines.

For TXN, AXP, etc., the implied volatility (IV) of the long put was greater than that of the short put by more than 2, which disqualified the trade.

For UNP, the long call’s IV had too high IV compared to the short call.

For DOCU, the long put was too expensive, and its IV was too high (compared to its short put).

## The Results

**Win Rate:** 77%

**Average P&L per trade:** $380

**Average Days in trade:** 33

**Average Return on risk:** 7%

**Average return on risk per day in trade:** 0.30%

The good news is that both strategies, when entered and managed correctly, have a positive expectancy and give positive returns in the long run.

At first glance, the double-calender has a higher return on risk at 7%, whereas the iron condor has 6%.

But wait.

How long did it take for the double-calendar to make those returns versus the iron condor?

It is on average 33 days versus 26 days, respectively.

It is often the case that the longer one can stay in the trade, the greater the P&L.

The trade duration is dependent on how one chooses the profit targets.

Normalizing the P&L of each trade to a “return on risk per day,” we see that the iron condor makes slightly more on a per-day basis.

The iron condor makes on average 0.38% per day in the trade.

The double diagonal has a 0.30% return on risk per day in trade.

In truth, the P&L’s of both strategies in this small limited backtest are so close that they are probably not statistically significant.

The results could have easily reversed simply from the result of one trade, or if one had used adjustment #2 instead of #3, or if another random date had been selected, etcetera.

## Conclusion

Based on manually back-trading these using OptionNet Explorer, the iron condor seems to pick up profits quicker than the double diagonal.

The double diagonal often might have negative P&L for some time before the P&L starts turning positive.

It often does not reach profit target until very close to the front-month expiration.

This characteristic of the double-diagonal makes it a complex strategy to trade.

Traders unfamiliar with it might inappropriately exit the trade at a negative P&L simply because the trade has been red for so long.

Coupled with the complex adjustments and the myriad of things one must monitor, we feel that beginners should first learn and master the iron condor strategy.

For these reasons, we crown the iron condor as the best non-directional defined-risk strategy.

But in all seriousness, with mock competitions aside, there is no one best options strategy for every situation.

It would be best if you had multiple tools in your toolkit.

It is like asking a carpenter which tool is the best.

For a nail sticking out of a piece of wood, the hammer is the best.

But if it had been a screw, a screwdriver would have been the best.

The iron condor and its double-diagonal cousin complement each other because the former is short vega and the latter is long vega.

The condor is fine most of the time.

But in environments when IV or VIX is very low, one may want to pull out a few double diagonals to balance some of the iron condors’ short vega.

If volatility increases, iron condors will be hurting, but double diagonals may be okay.

Trade safe!

*Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.*