Diagonal Spread
Using different strikes and expirations, commonly buying a longer-dated option and selling a shorter-dated option.
What is a Diagonal Spread?
Using different strikes and expirations, commonly buying a longer-dated option and selling a shorter-dated option.
Construction
Buy a longer-dated option and sell a shorter-dated option at a different strike.
When it may be studied
To study directional exposure combined with time-spread mechanics.
Expiration profile
Maximum risk: Net debit and assignment-related exposure
Maximum reward: Variable
Break-even: Variable
Worked example
Buy a longer-dated 95 call and sell a shorter-dated 105 call. Outcomes depend on underlying price, both volatility levels, and the chosen management point.
Key risks and limitations
Different strikes and expirations create changing risk. Assignment of the short option can produce stock exposure while the long option remains open.
Entry and exit checklist
- Confirm contract multiplier, expiration, exercise style, settlement, and liquidity.
- Calculate the maximum loss under the intended structure.
- Review earnings, dividends, corporate actions, and other event risks.
- Define an exit, adjustment, or expiration plan before entry.
- Understand what happens if one leg is assigned or exercised early.