advancedMedium RiskNeutral / Mildly Directional
Diagonal Spread
Different strikes AND different expirations. A flexible blend of calendar and vertical spreads.
What is a Diagonal Spread?
A diagonal spread buys a longer-dated option at one strike and sells a shorter-dated option at a different strike. It's like a calendar spread but with strikes moved out-of-the-money. You benefit from time decay on the short option while the long option holds its value.
When to use it
Use when you have a mild directional bias and want to collect time decay. The long option acts as protection for the short. Great for income generation with defined risk.
Structure
Buy 1 longer-dated option (lower strike for calls) + sell 1 shorter-dated option (higher strike for calls).
Key Metrics
Max Profit
Depends on IV of back month and how far the stock moves toward the short strike.
Max Loss
Net debit paid.
Breakeven
Evaluate with a P&L model — depends on expiration timing and IV.
Greeks Profile
Theta: positive (short option decays faster). Delta: directional bias from strike difference. Vega: positive (back month benefits from IV).
Tips & Best Practices
- 1The "diagonal" name refers to moving diagonally on the options chain (different strike AND expiration).
- 2Roll the short option forward each month to continuously collect premium.
- 3A deep ITM diagonal (LEAPS as back month) is essentially a PMCC.
- 4Keep the short option's delta low to minimize risk of assignment.
See it in action
Model a Diagonal Spread with a real ticker. See the P&L chart, heatmap, and exact breakevens.
Open Diagonal Spread Calculator →