Strategy reference
Diagonal Spread
A diagonal spread is a hybrid of a vertical spread (different strikes) and a calendar spread (different expirations). Mechanics depend on which strikes and expirations you pick.
Structure
Sell one near-term option at one strike and buy one longer-dated option of the same type at a different strike. Combines the strike difference of a vertical spread with the expiration difference of a calendar.
Payoff at expiration
When the near-term option expires, the short leg pays out its intrinsic value at the stock price, and the longer-dated leg retains time value as a function of where the stock is, how long it has left, and the volatility at that moment. The expiration-day shape is a hybrid of the vertical and calendar profiles; specific best- and worst-case numbers depend on which strikes and expirations you chose.
- Stock price
- $100
- Sell
- 1 × $100 call (30 days) @ $3.50
- Buy
- 1 × $105 call (60 days) @ $2.50
- Net credit
- $1.00
- Max loss
- Limited; depends on the strike-and-expiry combination
- Max gain
- Variable; depends on σ and the back leg's value at near-leg expiry
Frequently asked questions
What is a diagonal spread?
A diagonal spread combines a vertical spread (different strikes) with a calendar spread (different expirations). You sell a near-term option at one strike and buy a longer-dated option of the same type at a different strike.
How does the payoff of a diagonal spread work?
At the near-term expiration, the short leg pays its intrinsic value at that stock price and the longer-dated leg retains time value. Specific profit and loss numbers depend on the strike and expiration choices.
Is a diagonal spread bullish or bearish?
It depends on the strikes you pick. A call diagonal where the long leg is above the short leg is bullish; one where the long leg is below is bearish.
This page is an educational reference, not investment advice. Numbers in the worked example are approximations for illustration only — real option prices depend on volatility, interest rates, dividends, and time to expiration. See the full disclaimer for details.