If you've been trading double diagonals for a while, you've probably heard them described as a single, complex strategy. And if you're new, you've likely encountered explanations that sound like this: "Sell a strangle, buy a longer-dated strangle, manage the Greeks, adjust at 21 days, and trust theta."
It's not wrong. But it's overwhelming. And it hides something simpler underneath.
Here's the reframe that changes how you may look at double diagonals: a double diagonal isn't one trade. It's two trades, working together. Understanding each piece independently — then seeing how they combine — makes everything else about the strategy click. The rolling, the defending, the profit-taking. It becomes intuitive once the two pieces make sense on their own.
This is the first in a five-part series. Today: the foundation trade. The Short Strangle.
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What Is a Short Strangle?
A short strangle is the simpler half of a double diagonal. Here's the anatomy:
You sell an OTM call. You sell an OTM put. Both expire on the same date. Neither is "naked" in the traditional sense — your risk on the upside is mitigated by the call premium you collected, and the same on the downside with the put, plus the premium of the opposing premium collected. So, if you collected $30 on a SPX strangle, you have an additional $30 beyond a threatened strike before you incur a loss.
Here's what it looks on a risk graph:
- Short Call: max profit = premium collected, max loss = unlimited (in theory)
- Short Put: max profit = premium collected, max loss = put strike goes to zero
Together, you have a short strangle. Income strategy. Theta decay working for you every day.
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Why Do You Sell It?
Because time is money. Every day that passes, your short options lose a small amount of value. That decay is predictable, constant, and flows into your account whether the market moves or not. This is theta — the Greek that makes income trading different from directional trading.
You're not betting on direction. You're selling insurance against complacency.
The sweet spot for selling a strangle, in my experience, is 30–45 days to expiration (DTE). More than 45 days and the theta decay is too slow to be satisfying. Less than 21 days and gamma risk accelerates sharply — a small move against you can erase a week's worth of theta gains in an afternoon.
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The Income Engine
The short strangle is the income engine of the double diagonal. The premium you collect is your paycheck. You want to collect enough that:
1. The premium cushions small moves against you
2. The theta decay is fast enough to generate meaningful daily erosion
3. Your breakeven on the short side is wide enough to give the market room to breathe
In my trading, I typically sell at approximately 16-delta on both sides. That's roughly one standard deviation of expected move, based on the current implied volatility. Tastytrade’s research supports this — at 16 delta, you're selling at a level where the market has a roughly 68% probability of staying above your put strike and below your call strike at expiration.
That's not a guarantee. But it's a statistical edge, repeated over hundreds of trades.
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What Happens When the Market Moves Against You
Here's where most traders panic. The short strangle, by itself, has undefined risk. If the market gaps down hard, your short put can go from $2 wide to $20 wide overnight. The premium you collected looks tiny against the mark-to-market loss.
This is why I always say: the short strangle is never traded alone in my portfolio. It's always part of a double diagonal — which means it's always paired with a long strangle of longer-dated options. That long side is the safety valve.
But we'll get to that in Part 2. Don’t trade this without the next article!
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The Short Strangle Summary
- Sell OTM call + sell OTM put, same expiration (I use 30–45 DTE)
- Collect premium as income; theta decay works in your favor daily
- Delta target: approximately 16 delta on both sides
- Risk: undefined on both sides — this is why it needs the long strangle hedge (Part 2)
- Best used as part of a larger strategy, not as a standalone trade
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Coming in Part 2: The Insurance Trade — Understanding the Long Strangle. We'll look at why you buy longer-dated options on the opposite side, what 12-delta means, and how the long strangle turns the short strangle from a scary undefined-risk trade into a defined-risk, income-producing machine.
Disclosure: Options trading involves substantial risk of loss and is not suitable for all investors. Before buying or selling options, carefully consider your investment objectives, level of experience, and financial resources. Past performance of any security or strategy does not guarantee future results. Information and educational materials related to options trading are provided for informational purposes only and do not constitute investment advice. The Options Clearing Corporation (OCC) publishes a comprehensive overview of the risks associated with exchange-listed options, which is available at OCC Risk Disclosure (https://www.theocc.com/about/publications/characterizations.jsp).