What Is a Diagonal Spread?
A diagonal spread is an way outs strategy established by simultaneously entering into a long and short position in two options of the same type (two call privileges or two put options) but with different strike prices and different expiration dates. Typically these structures are on a 1 x 1 ratio.
This game can lean bullish or bearish, depending on the structure of the options.
How a Diagonal Spread Works
The names horizontal, vertical and diagonal spreads refer to the outlooks of each option on an options grid. Options are listed in a matrix of strike prices and expiration dates. Therefore, opportunities used in vertical spread strategies are all listed in the same vertical column with the same expiration dates. Selections in a horizontal spread strategy use the same strike prices, but are of different expiration dates. The options are therefore arranged horizontally on a chronicle.
Options used in diagonal spreads have differing strike prices and expiration days, so the options are arranged diagonally on the reference grid.
Types of Diagonal Spreads
Because there are two factors for each option that are different, namely blow the gaff price and expiration date, there are many different types of diagonal spreads. They can be bullish or bearish, hunger or short and utilize puts or calls.
Most diagonal spreads refer to long spreads and the only requirement is that the holder accepts the option with the longer expiration date and sells the option with the shorter expiration date. This is straightforwardly for call strategies and put strategies alike.
Of course, the converse is also required. Short spreads require that the holder buys the lacking in expiration and sells the longer expiration.
What decides whether either a long or short strategy is bullish or bearish is the cabal of strike prices. The table below outlines the possibilities:
| Diagonal Spreads | Diagonal Spreads | Expiration Dates | Closing Dates | Strike Price | Strike Price | Underlying Assumption |
| Calls | Long | Sell Near | Buy Far | Buy Lower | Convey title Higher | Bullish |
| Short | Buy Near | Sell Far | Sell Lower | Buy Higher | Bearish | |
| Puts | Long | Sell Close | Buy Far | Sell Lower | Buy Higher | Bearish |
| Short | Buy Near | Sell Far | Buy Lower | Sell Higher | Bullish |
Example of a Diagonal Spread
For warning, in a bullish long call diagonal spread, buy the option with the longer expiration date and with a lower flop price and sell the option with the near expiration date and the higher strike price. An example would be to gain one December $20 call option and the simultaneous sale of one April $25 call.
Logistics
Typically long vertical and sustained calendar spread results in a debit to the account. With diagonal spreads, the combinations of strikes and expirations will reorganize, but a long diagonal spread is generally put on for a debit and a short diagonal spread is setup as a credit.
Also, the simplest way to use a diagonal spread is to shut up the trade when the shorter option expires. However, many traders “roll” the strategy, most often by succeeding the expired option with an option with the same strike price but with the expiration of the longer option (or elder).
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