Diagonal debit spreads are flexible positions that can profit over a wide range of underlying prices and can fit any type of directional outlook. A double diagonal spread simply combines two of these spreads — bullish and bearish positions — to create a market-neutral trade that exploits the time decay of its short options.

The complete spread contains four options in two expiration months and is designed to profit from the passage of time. However, the strategy is vulnerable to large moves in the underlying price as well as drops in implied volatility. The key to success lies in selecting appropriate markets, expiration months, and strike prices. (This month’s Options Strategy Lab tests double diagonals on the S&P 500 and discovers they have been profitable since 2000.).