diff --git a/pdd/update_main.py b/pdd/update_main.py
index 9a45f6f3..11a26e3d 100644
--- a/pdd/update_main.py
+++ b/pdd/update_main.py
@@ -67,6 +67,7 @@ def resolve_prompt_code_pair(code_file_path: str, quiet: bool = False, output_di
         pass
 
     # Determine the base prompts directory
+    context_config = {}
     if output_dir:
         # Use the custom output directory (absolute path)
         base_prompts_dir = os.path.abspath(output_dir)
diff --git a/tests/test_e2e_issue_493_update_output_subdir.py b/tests/test_e2e_issue_493_update_output_subdir.py
new file mode 100644
index 00000000..d3169daa
--- /dev/null
+++ b/tests/test_e2e_issue_493_update_output_subdir.py
@@ -0,0 +1,82 @@
+"""
+E2E Test for Issue #493: pdd update --output crashes with NameError when
+code file is in a subdirectory.
+
+This test exercises the full update_main() → resolve_prompt_code_pair() path
+that a user triggers via `pdd update <code_file> --output <path>`. It mocks
+only the LLM call (update_prompt) and agent availability at the system boundary,
+but exercises all real path resolution logic including .pddrc context detection,
+git repo discovery, and subdirectory structure preservation.
+
+Bug: resolve_prompt_code_pair() defines context_config only in the else branch
+(when --output is NOT provided) but references it unconditionally when computing
+code_root. When --output IS provided and the code file is in a subdirectory
+(rel_dir != "."), this causes an UnboundLocalError.
+"""
+
+import git
+import click
+from pathlib import Path
+from unittest.mock import patch
+
+from pdd.update_main import update_main
+
+
+def test_e2e_update_output_flag_with_subdirectory_code_file(tmp_path, monkeypatch):
+    """
+    E2E regression test: `pdd update backend/src/module.py --output /tmp/output/`
+    should NOT crash with NameError when the code file is in a subdirectory.
+
+    Exercises: update_main → resolve_prompt_code_pair → path resolution with --output.
+    Mocks: LLM call (update_prompt), agent availability (get_available_agents).
+    """
+    # Setup: realistic repo structure matching the issue reproduction
+    repo_path = tmp_path / "pdd-test"
+    repo_path.mkdir()
+    sub_dir = repo_path / "backend" / "src"
+    sub_dir.mkdir(parents=True)
+    code_file = sub_dir / "module.py"
+    code_file.write_text("def hello(): return 'world'")
+
+    output_dir = tmp_path / "output"
+    output_dir.mkdir()
+
+    # Initialize git repo (required for repo root detection)
+    repo = git.Repo.init(repo_path)
+    repo.index.add([str(code_file)])
+    repo.index.commit("init")
+
+    monkeypatch.chdir(repo_path)
+
+    # Build a real Click context like the CLI would
+    ctx = click.Context(click.Command("update"))
+    ctx.obj = {
+        "strength": 0.5,
+        "temperature": 0.0,
+        "verbose": False,
+        "quiet": True,
+    }
+
+    with patch("pdd.update_main.update_prompt") as mock_up, \
+         patch("pdd.update_main.get_available_agents", return_value=[]), \
+         patch("pdd.update_main.get_language", return_value="python"):
+
+        mock_up.return_value = ("generated prompt content", 0.01, "mock-model")
+
+        # Act: This is what `pdd update backend/src/module.py --output /tmp/output/` does
+        result = update_main(
+            ctx=ctx,
+            input_prompt_file=None,
+            modified_code_file=str(code_file),
+            input_code_file=None,
+            output=str(output_dir),
+            use_git=False,
+        )
+
+    # Assert: should succeed, not crash with NameError
+    assert result is not None, "update_main returned None, indicating a crash or error"
+    assert result[0] == "generated prompt content"
+
+    # The prompt file should exist somewhere under the output directory
+    prompt_files = list(output_dir.rglob("*_python.prompt"))
+    assert len(prompt_files) >= 1, f"No prompt file created in {output_dir}"
diff --git a/tests/test_update_main.py b/tests/test_update_main.py
index 5ab235a6..fe4f6fb3 100644
--- a/tests/test_update_main.py
+++ b/tests/test_update_main.py
@@ -708,4 +708,97 @@ def agentic_side_effect(prompt_file, **kwargs):
 
     # Source must remain unchanged even after agentic failure
     assert source_prompt.read_text() == original_content, \
-        "Source prompt was corrupted by failed agentic update"
\ No newline at end of file
+        "Source prompt was corrupted by failed agentic update"
+
+
+# --- Tests for issue #493: NameError when using --output with subdirectory code file ---
+
+from pdd.update_main import resolve_prompt_code_pair
+
+
+def test_resolve_prompt_code_pair_output_dir_with_subdirectory_code_file(tmp_path, monkeypatch):
+    """
+    Regression test for GitHub issue #493.
+    resolve_prompt_code_pair() crashes with UnboundLocalError when --output is provided
+    and the code file is in a subdirectory (rel_dir != "."), because context_config
+    is only defined in the else branch but used unconditionally when computing code_root.
+    """
+    # Setup: git repo with code file in a subdirectory
+    repo_path = tmp_path / "test_repo"
+    repo_path.mkdir()
+    sub_dir = repo_path / "backend" / "src"
+    sub_dir.mkdir(parents=True)
+    code_file = sub_dir / "module.py"
+    code_file.write_text("def hello(): return 'world'")
+
+    output_dir = tmp_path / "output"
+    output_dir.mkdir()
+
+    monkeypatch.chdir(repo_path)
+    git.Repo.init(repo_path)
+
+    with patch("pdd.update_main.get_language") as mock_lang:
+        mock_lang.return_value = "python"
+
+        # This should NOT raise NameError for context_config
+        prompt_path, code_path = resolve_prompt_code_pair(
+            str(code_file), quiet=True, output_dir=str(output_dir)
+        )
+
+    # The prompt file should be created under the output directory
+    assert os.path.exists(prompt_path)
+    assert Path(prompt_path).is_relative_to(output_dir)
+    assert prompt_path.endswith("module_python.prompt")
+
+
+def test_resolve_prompt_code_pair_output_dir_with_root_level_code_file(tmp_path, monkeypatch):
+    """
+    Edge case for issue #493: code file at repo root with --output should work
+    (this path doesn't hit the bug since rel_dir == "." skips the code_root logic).
+    """
+    repo_path = tmp_path / "test_repo"
+    repo_path.mkdir()
+    code_file = repo_path / "module.py"
+    code_file.write_text("def hello(): return 'world'")
+
+    output_dir = tmp_path / "output"
+    output_dir.mkdir()
+
+    monkeypatch.chdir(repo_path)
+    git.Repo.init(repo_path)
+
+    with patch("pdd.update_main.get_language") as mock_lang:
+        mock_lang.return_value = "python"
+
+        prompt_path, code_path = resolve_prompt_code_pair(
+            str(code_file), quiet=True, output_dir=str(output_dir)
+        )
+
+    assert os.path.exists(prompt_path)
+    assert prompt_path.endswith("module_python.prompt")
+
+
+def test_resolve_prompt_code_pair_no_output_dir_subdirectory_still_works(tmp_path, monkeypatch):
+    """
+    No-regression test for issue #493: without --output, subdirectory code files
+    should still work as before (context_config is defined in else branch).
+    """
+    repo_path = tmp_path / "test_repo"
+    repo_path.mkdir()
+    sub_dir = repo_path / "backend"
+    sub_dir.mkdir()
+    code_file = sub_dir / "module.py"
+    code_file.write_text("def hello(): return 'world'")
+
+    monkeypatch.chdir(repo_path)
+    git.Repo.init(repo_path)
+
+    with patch("pdd.update_main.get_language") as mock_lang:
+        mock_lang.return_value = "python"
+
+        prompt_path, code_path = resolve_prompt_code_pair(
+            str(code_file), quiet=True
+        )
+
+    assert os.path.exists(prompt_path)
+    assert prompt_path.endswith("module_python.prompt")