I aked Grok 3 about our trading plan. I left it ‘open ended’ where Grok could suggest other deltas, days-to-expiration, etc. It turns out, Grok agrees! The only dispute is the delta to place your long strangle hedge component of your double diagonal. This is always somewhat suggestive and sometimes can be based on your capital available; your market fears; and other components of construction of the double diagonal. here’s the exact conversation!
Me: You are an expert in options trading strategy optimization. Create a detailed step-by-step plan for implementing a double diagonal spread on the Russell 2000 (RUT) index with the following conditions: Short Strangle Details: Sell a short strangle approximately 30-37 days to expiration (DTE), rolling it every 7 days at 23-29 DTE. Adjust the strikes on each roll by moving up or down to the nearest strike closest to the optimal delta for profit/risk balance. Determine the optimal delta for the short call and short put to minimize risk and maximize profit. Long Strangle Details: Hedge the short strangle with a long strangle purchased at least 120 days out. Keep the long strangle static until the 60th trading day, then roll it out again to approximately 120 DTE. Determine the best delta for the long call and long put to balance the hedge’s cost-effectiveness with its protective properties. Optimization Parameters: Evaluate whether 120 DTE is optimal for the long strangle or if a different time frame (e.g., 90 days, 150 days) would improve performance or lower risk. Assess whether the DTE for the short strangle (30 days, rolling at 23 DTE) could be adjusted to enhance profits or reduce risk, say using the 37 DTE and rolling at 30 DTE. Output: Provide the recommended deltas for the short and long options. Also, what the best date and time for the rolls on the RUT to maximize profit. Suggest the optimal DTE adjustments, if any, for both the short and long strangles. Summarize findings concisely, prioritizing actionable insights to minimize risk and maximize profit.
Grok 3:
Let’s create a detailed step-by-step plan for implementing and optimizing a double diagonal spread on the Russell 2000 (RUT) index based on your specified conditions. A double diagonal spread combines a short strangle (selling near-term options) with a long strangle (buying longer-term options) at wider strikes, aiming to profit from time decay while hedging against large moves. I’ll break this down systematically, determine optimal deltas, evaluate DTE parameters, and provide actionable recommendations.
Step-by-Step Plan for Implementing the Double Diagonal Spread
1. Understand the Structure
Short Strangle: Sell a call and a put 30-37 DTE, rolled every 7 days at 23-29 DTE. Adjust strikes on each roll based on optimal delta.
Long Strangle: Buy a call and a put at least 120 DTE as a hedge, held static until the 60th trading day, then rolled to ~120 DTE.
Goal: Maximize theta decay from the short strangle while minimizing risk with the long strangle hedge.
2. Determine Optimal Deltas
Short Strangle Deltas:
Target: Balance profit potential (theta decay) with risk (gamma and directional exposure).
Typical range: 0.15–0.25 delta (out-of-the-money, OTM).
Analysis:
Delta 0.20 provides a good trade-off—far enough OTM to reduce assignment risk and gamma exposure, yet close enough to collect decent premium (15-20% of the RUT’s width).
RUT volatility (e.g., RVX ~20-30%) suggests wider spreads than equity indices like SPX. A 0.20 delta aligns with a strike ~1 standard deviation OTM over 30 days, offering a ~68% probability of expiring worthless.
Recommendation: Short call delta = 0.20, short put delta = -0.20.
Long Strangle Deltas:
Target: Cost-effective hedge with sufficient protection against tail risk.
Typical range: 0.10–0.20 delta (further OTM than shorts).
Analysis:
Delta 0.15 balances cost and coverage. At 120 DTE, the RUT’s higher volatility increases option prices, so a 0.15 delta keeps the hedge affordable (5-10% of short premium) while covering ~85% of potential moves (1.5 standard deviations).
Wider deltas (e.g., 0.10) reduce cost but weaken protection; closer deltas (e.g., 0.20) increase cost without proportional benefit.
Recommendation: Long call delta = 0.15, long put delta = -0.15.
3. Set Up the Initial Trade
Short Strangle:
Today: February 20, 2025. Select options expiring March 27, 2025 (35 DTE).
RUT level (hypothetical): 2200.
Sell 2280 call (delta ~0.20).
Sell 2120 put (delta ~-0.20).
Collect premium (e.g., $8-10/call, $8-10/put, total ~$16-20/contract).
Long Strangle:
Buy options expiring June 20, 2025 (~120 DTE).
Buy 2340 call (delta ~0.15).
Buy 2060 put (delta ~-0.15).
Cost (e.g., $5-7/call, $5-7/put, total ~$10-14/contract).
Net credit: ~$2-6/contract after hedge cost.
4. Manage the Short Strangle Rolls
Timing: Roll every 7 days when DTE reaches 23-29 (e.g., March 6, 2025, at 28 DTE).
Strike Adjustment:
Recalculate RUT’s spot price and move strikes to maintain ~0.20 delta.
Example: If RUT rises to 2250, sell 2330 call and 2170 put.
Execution: Close existing short strangle, open new one at 30-37 DTE (e.g., April 10, 2025, expiration).
5. Manage the Long Strangle
Hold static until the 60th trading day (~April 21, 2025, ~60 DTE remaining).
Roll to new 120 DTE expiration (e.g., August 22, 2025).
Maintain ~0.15 delta strikes.
6. Optimize DTE Parameters
Short Strangle DTE (30-37, roll at 23-29):
Analysis:
30 DTE captures high theta decay but increases gamma risk as expiration nears.
37 DTE reduces gamma risk and allows more flexibility, potentially increasing profit by 5-10% due to smoother decay curves (less acceleration near expiration).
Rolling at 30 DTE (vs. 23) preserves more time value, reducing transaction costs and slippage.
Recommendation: Start at 37 DTE, roll at 30 DTE for lower risk and higher consistency.
Long Strangle DTE (120 static, roll at 60):
Analysis:
120 DTE minimizes vega decay and keeps hedging power stable, but costs more upfront.
90 DTE reduces cost (~20-30% cheaper) but increases vega sensitivity, weakening the hedge.
150 DTE adds minimal protection for higher cost (~10-15% more), reducing net credit.
Rolling at 60 DTE is optimal—earlier (e.g., 75) increases costs, later (e.g., 45) risks hedge decay.
Recommendation: Stick with 120 DTE, roll at 60 DTE for cost-effectiveness and protection.
7. Best Date and Time for Rolls
Short Strangle: Roll Thursdays at 2:00 PM EST (1-2 days before weekly expiration cycles, avoiding weekend theta decay and liquidity crunches).
Long Strangle: Roll on the 60th trading day (e.g., April 21, 2025) at 2:00 PM EST (midweek liquidity peak).
Why: RUT options trade actively midweek; late afternoon minimizes overnight risk and captures tighter bid-ask spreads.
Recommended Parameters
Short Strangle:
Delta: 0.20 (call), -0.20 (put).
DTE: Start at 37 DTE, roll at 30 DTE every 7 days.
Long Strangle:
Delta: 0.15 (call), -0.15 (put).
DTE: Start at 120 DTE, roll at 60 DTE.
Roll Timing:
Short: Thursdays, 2:00 PM EST.
Long: 60th day (e.g., April 21, 2025), 2:00 PM EST.
Summary of Findings
Deltas: Short at 0.20 and long at 0.15 optimize the profit/risk ratio—shorts maximize premium, longs provide affordable tail protection.
DTE Adjustments: Shifting short strangle to 37 DTE (roll at 30) reduces gamma risk and enhances consistency; 120 DTE for longs (roll at 60) balances cost and hedging power.
Profit Maximization: Rolling shorts weekly at 37-30 DTE captures steady theta while adjusting strikes dynamically to market moves.
Risk Minimization: Long strangle at 120 DTE with 0.15 delta hedges ~85% of tail risk without eroding net credit excessively.
Actionable Insight: Implement on February 20, 2025, with initial strikes based on RUT’s spot (e.g., 2200), monitor IV (RVX), and adjust if volatility spikes >35%.
This plan leverages RUT’s volatility and liquidity, offering a robust framework for profit while controlling risk. Adjust strikes and monitor greeks weekly to stay aligned with market conditions.
Disclaimer: Grok is not a financial adviser; please consult one. Don’t share information that can identify you.