Explore Your Options by Tom Gentile
SHORT STRADDLE TO HEDGE?
What’s your opinion on establishing a short straddle hedge to offset the risk of a long straddle?
If a trader wants to establish offsetting straddle positions in different contract months, the combined spreads can be an effective means of reducing the risks associated with the greeks of theta and vega. The net position is commonly referred to as a double diagonal.
A long double diagonal can be approached when a trader wants to hold long curvature or premium in a longer-dated straddle in anticipation of a stock move and/or increase in implied volatility but is concerned that a quiet near-term underlying instrument will pressure the spread.