What is a Diagonal Spread? A Simple Guide

A diagonal spread combines features of a calendar spread and a vertical spread, using different strikes and different expiries. You sell a near-expiry option at one strike and buy a longer-expiry option at another. It blends directional and time-decay elements.

A diagonal spread is a flexible strategy that mixes two ideas: profiting from time decay and taking a directional lean. It uses different strikes and different expiries.

What follows is a no-nonsense guide for Indian traders. You can trade it on Stockk.

Key Takeaways

• It uses different strikes and different expiries.
• It blends time decay with a directional tilt.
• It can be structured bullish or bearish.
• It is more flexible than a calendar spread.
• It is an advanced strategy to manage.

How does a diagonal spread work?

By using both different strikes and different expiries, a diagonal spread captures time decay like a calendar spread while adding a directional bias like a vertical spread. You can tailor the strike gap and expiry gap to express a specific view.

Picture this: NIFTY trades at 22,600. You sell the weekly 22,800 call at ₹60 and buy the monthly 22,600 call at ₹250, so the position costs ₹190 to open. The different strikes add a directional tilt, while the different expiries add the time-decay element. Because the sold call sits above the bought one, the position gains if NIFTY drifts up toward 22,800.

Unlike a calendar spread, where the profit peak sits right at the current price, a diagonal's peak shifts toward the sold strike, reflecting its upward tilt.

Calendar vs diagonal

When traders use diagonal spreads

Diagonal spreads suit traders with a mild directional view who also want to benefit from time decay. They can be structured as bullish or bearish, and adjusted over time by rolling the short option. The flexibility rewards experienced traders who understand both strike and expiry effects.

Why it is advanced

Managing two strikes and two expiries at once makes the diagonal more complex than a simple spread. Its profit depends on how price, time and volatility interact. Beginners are usually better off mastering vertical and calendar spreads first before attempting diagonals.

Curious to try diagonal spread and other strategies yourself? Head to Stockk, open a quick demat account, and use the Knowledge Center whenever you need a refresher.

Futures and Options are leveraged products and carry a high risk of loss that can be more than the money you put in. This article is only for learning and is not a recommendation to trade in derivatives.

Frequently Asked Questions