Trading With Dan Sheridan (Part 3)
Double Diagonals And Butterfly Spreads by John A. Sarkett
The third part of this series with trader Dan Sheridan looks
at double diagonals with long, protective wings one or more
months out from the short options, as well as the butterfly
spread, an income-generating strategy.
Double diagonals are Dan Sheridan’s single favorite
strategy, and he likes to mix double
diagonals in a portfolio with condors for diversification.
Here’s why: While increasing volatilities
hurts the condors, it helps the diagonals. So one offsets the other. Let’s look at double diagonals first.
In addition, the double diagonals strategy has a more favorable
risk–reward ratio than other income strategies — 1:2,
1:3, 1:4, compared with 1:10 for condors. The yields can
reach 15% to 30% for 30 days on average.
Remember, this is a business — “An insurance company
without the overhead,” as Sheridan says. Remember, he was
a market maker for 22 years. Everything he does is hedged,
quantified, managed, and managed in advance, “managed in
times of peace, not in times of war,” as he puts it.
Best option candidates for double diagonal strategy
• Stock is greater than $30
• Implied volatility (IV) in lowest two thirds of its
• Nontrenders, sideways movers
• Low volatilities (for nonmovers, we want to go
• Skews (volatilities near and far) in line, not more
than four points apart
• Nonearnings months — again, we don’t want
movement due to news
• Boring, sideways, predictable industries, no
biotech startups or the like.