What Is a Diagonal Spread?

A diagonal spread is a modified calendar spread involving different 澳洲幸运5官方开奖结果体彩网:strike prices. It is an opti𒀰ons strategy established by simultaneously entering into a long and short position in two options of the same type—two call options or two put options—but with different strike prices and different expiration dates.

This strategy can lean bullish or bearish, depending on the structure and the options utilized.

How a Diagonal Spread Works

This strategy is called a diagonal spread because it combines a 澳洲幸运5官方开奖结果体彩网:horizontal spread (also called a time spread or calendar spread), which involves a difference in expiration dates, and a 澳洲幸运5官方开奖结果体彩网:vertical spread (price sprea♛d), which involves a difference in strike prices.

The terms horizontal, vertical, and diagonal spreads refer to the positions of each option on an options grid. Options are listed in a matrix of strike prices and 澳洲幸运5官方开奖结果体彩网:expiration dates. Options used in vertical spread strategies are all listed in the same vertical column with the same expiration dates. Options in a horizontal spread strategy, meanwhile, use the same strike pri🐽ces, but are of different expir♈ation dates. The options are, therefore, arranged horizontally on a calendar.

Options෴ used in diagonal spreads have differing strike prices and expiration days, so the options are arranged diagonally on the quote 𒀰grid.

Types of Diagonal Spreads

Because there are two factors for each option that are different, namely strike price and expiration date, there are many different types of diagonal spreads. They can be bullish or bearish, long or short, and utilize either puts or calls.

Most diagonal spreads are long spreads and the only requirement is that the holder buys the option with the longer expiration date and sells the option with the shorter expiration date. This is true for both call diagonals and put diagonals alike.

Of cou🐷rse, the converse is💎 also required. Short spreads require that the holder buys the shorter expiration and sells the longer expiration.

What decides whethe൲r either a long or short strategy is bullish or bearish is th🐠e combination of strike prices. The table below outlines the possibilities:

Example of a Diagonal Spread

For example, in a bullish long call diagonal spread, buy the option with the longer expiration date and with a lower strike price and sell the option with the near expiration date and the higher strike price. An example wou𒁃ld be to purchase one December $20 call option and the simultaneous sale of one April $25 call.

Special Considerations

Typically, these are structured on a 1:1 ratio, and long vertical and long calendar spread results in a debit to the account. With diagonal spreads, the combinations of strikes and expirations will vary, but a long diagonal spread is generally put on for a debit and a short diagonal spread is set up as a credit.

Also, the simplest way to use a diagonal spread is to close the trade when the shorter option expires. However, many traders "roll" the strategy, most often by replacing the expired option with an option with the same strike price but with the expiration of the longer option (or earlier).