Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

How to Take a Short Term Neutral to Bullish View using 4 Legged Option Strategy

1 min read

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.

Lets 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 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 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 in order 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

Strategy is composted of 4 legged strategy with a holding period till current month expiry hedged with next month long options on both the sides as shown below

Actual Position

Sell 11200 Puts – Jul 2020 Contract at Rs173/lot
Sell 11500 Calls – Jul 2020 Contract at Rs 27.05/lot

Hedge Position

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 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 DayProfit/Loss in Rupees per set
10,900.0030-Jul-20-7,539.93
10,925.0030-Jul-20-6,413.83
10,950.0030-Jul-20-5,241.50
10,975.0030-Jul-20-4,022.19
11,000.0030-Jul-20-2,755.19
11,025.0030-Jul-20-1,439.85
11,050.0030-Jul-20-75.56
11,075.0030-Jul-201,338.21
11,100.0030-Jul-202,801.97
11,125.0030-Jul-204,316.15
11,150.0030-Jul-205,881.12
11,175.0030-Jul-207,497.21
11,200.0030-Jul-209,164.66
11,225.0030-Jul-209,008.68
11,250.0030-Jul-208,904.40
11,275.0030-Jul-208,851.88
11,300.0030-Jul-208,851.14
11,325.0030-Jul-208,902.13
11,350.0030-Jul-209,004.71
11,375.0030-Jul-209,158.73
11,400.0030-Jul-209,363.94
11,425.0030-Jul-209,620.04
11,450.0030-Jul-209,926.67
11,475.0030-Jul-2010,283.43
11,500.0030-Jul-2010,689.85
11,525.0030-Jul-209,270.41
11,550.0030-Jul-207,899.52
11,575.0030-Jul-206,576.58
11,600.0030-Jul-205,300.91
11,625.0030-Jul-204,071.80
11,650.0030-Jul-202,888.49
11,675.0030-Jul-201,750.19
11,700.0030-Jul-20656.07
11,725.0030-Jul-20-394.75
11,750.0030-Jul-20-1,403.16
11,775.0030-Jul-20-2,370.09
11,800.0030-Jul-20-3,296.48

Update on 28th July 2020 – 9.40a.m

Closing the Neutral Spreads in Nifty as the daily sentiment holds negative Profits Rs 4383/- per set

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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7 Replies to “How to Take a Short Term Neutral to Bullish…”

  1. Dear Mr. Rajendran
    Your strategy is long vega and hence may not be suitable for nifty IVP 0f 66.
    Kindly also tell us how to manage the trade. adjustments. Kindly explain ëxit onesided spreads”.

  2. Sir, I inserted your values, I am not getting proper diagram, can you advice me some pay off diagram software or where are you making it.

  3. 1) Is this a typo ‘Nifty Index Upside stop-loss for exiting Bull Call Calendar Spread: 10750’ should be 11750
    2) suggested SL exits to be executed on all positions or affected side only

  4. Hi, Have you made a brief note on all types of options with different types of combinations? If so, can you favour the same to my email for my study purpose?

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