The Most Consistently Profitable Options Trading Strategy (Step-by-Step Guide)

If you ask most beginners what the "best" options trading strategy is, the answer usually involves chasing overpriced calls and puts on trending, volatile stocks. Unfortunately, this is often the fastest way to drain a trading account. The odds of winning on high-flying, hot stocks are frequently far worse than the average retail trader realizes.

A truly robust strategy doesn't rely on luck or massive directional moves. Instead, it relies on a winning framework: a specific set of entry criteria and a repeatable, rule-based process. One of the most respected strategies among professional traders for generating consistent income is the Double Diagonal.

By shifting focus from directional speculation to probability and time decay, traders can construct positions that profit even when a stock does very little. Below, we break down the specific criteria required to execute this strategy and review a 12-month case study demonstrating its potential power.

Key Takeaways

• Asset Selection is Critical: Success relies on finding stocks or ETFs with flat, range-bound price charts rather than volatile trending assets.
• Understanding Delta: The strategy utilizes low-delta options (below 20) to mathematically increase the probability of options expiring worthless.
• The Double Diagonal Structure: This involves selling near-term options to collect premiums while buying longer-term options to hedge and retain residual value.
• Resilience in Drawdowns: Even when the stock price breaches the profit range, the increased value of the long-term hedge can often offset losses on the short position.

The Three Pillars of Asset Selection

Before executing a single trade, you must ensure the underlying asset is actually suitable for this specific strategy. The Double Diagonal is not a "one size fits all" tool; it requires a specific market environment. There are three non-negotiable prerequisites to check off your list.

1. A Flat Price Chart

The first step is to identify a stock, ETF, or index that exhibits a very flat price chart. This strategy thrives on stagnation rather than momentum. For our case study, we look at TLT (the iShares 20+ Year Treasury Bond ETF). Looking at the historical data leading into 2025, TLT spent the vast majority of its time trading in a tight range between $87 and $100.

When an asset consolidates like this, it signals that the market has found an equilibrium, making it an ideal candidate for a strategy that profits from time passage rather than price movement.

2. Monthly Expirations

Liquidity and expiration cycles matter. While many popular stocks have weekly options, some smaller tickers only offer quarterly expirations. For the Double Diagonal to work effectively as a monthly income campaign, the options chain must offer at least one expiration for every month of the upcoming year.

3. Tight Bid-Ask Spreads

Finally, you must verify that the individual strike prices have tight bid-ask spreads. This is a measure of liquidity. If the spread is too wide, you will lose too much money to slippage when entering and exiting the trade. In the case of highly liquid ETFs like TLT, spreads are often as tight as one to three cents, ensuring you get a fair and competitive price.

Constructing the Double Diagonal Trade

Once the criteria are met, the execution follows a strict calendar-based schedule. The strategy is typically initiated on the third Friday of the month—a standard monthly expiration date—and involves a four-legged order structure.

The Short Legs: Selling Probability

The engine of this trade is selling options in the near-term expiration cycle (roughly 30 days out). The goal is to sell options that have a high probability of expiring worthless. To determine this, we look at Delta.

"The delta of an option is a mathematically arrived at prediction of how much an options price is likely to move... it has also been found to be highly correlated to the probability that an option will expire with value."

The strategy calls for finding the first call and put options with a Delta below 20. Mathematically, a 20 Delta implies there is roughly only a 20% chance the option will expire "in the money" (with value). Conversely, there is an 80% chance it will expire worthless. By selling these options, you align the probabilities in your favor.

The Long Legs: Buying Protection

To complete the "diagonal," you must purchase protection in a later expiration cycle—typically two months out. You will buy calls and puts that are further out of the money (usually 5 points higher for calls and 5 points lower for puts) than the options you sold.

By selling near-term options and buying longer-term options, you create a position where the near-term options decay faster than the long-term options. This differential in time decay (Theta) creates the profit zone.

Anatomy of a Winning Campaign

To understand the mechanics of profit, it is helpful to look at how a trade resolves. In our TLT example, the trade is entered for a net credit (cash received upfront). However, the real profit generation happens at expiration.

The Ideal Scenario

In a perfect month, the stock price stays relatively flat. Because you sold options with a sub-20 Delta, the likelihood is that the stock price will remain between your short call and short put strikes. On expiration day:

• The short options (the ones you sold) expire worthless. You keep the full premium received for them.
• The long options (the ones you bought for next month) still possess significant time value because they have another 30 days until expiration.
• You close the trade by selling the long options back to the market.

Your total profit is calculated as the initial cash received plus the cash generated from selling the remaining long options.

Resilience During Volatility

Markets are rarely perfect for 12 straight months. Eventually, the stock will move against you. In the TLT case study, there was a month where the price dropped below the short put strike. In a standard trade, this could result in a significant loss or stock assignment.

However, the Double Diagonal has a built-in hedge. When the stock dropped significantly, the short put lost money, but the long put (which you own) exploded in value. Because the long put still had time value and was now closer to the money, its price appreciated enough to offset the loss on the short side. This specific dynamic allowed the strategy to remain profitable even when the price chart "broke" its range.

Conclusion

The Double Diagonal is not a "get rich quick" scheme; it is a strategic approach to extracting value from flat markets. By utilizing a 12-month campaign approach, traders can smooth out the variance of individual months and focus on annual yield. In the case of the TLT example, the strategy yielded an impressive 77.5% return over the year, primarily because the underlying asset adhered to the selection criteria of a flat chart.

The most challenging aspect of this strategy is not the execution, but the discipline required to select the right chart. If you can identify an asset that is consolidating and strictly follow the Delta and expiration rules, the Double Diagonal offers a compelling mathematical edge for the patient trader.