Are diagonal spreads better than credit spreads?

Diagonal spreads can have a higher max profit than a credit spread due to the intrinsic value potential a diagonal spread can gain on a beneficial stock price move. Still, diagonal spreads are very directional trades.

How do Diagonal spreads work?

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.

What is a credit spread option strategy?

A credit spread can also refer to an options strategy where a high premium option is written and a low premium option is bought on the same underlying security. A credit spread options strategy should result in a net credit, which is the maximum profit the trader can make.

Can call Diagonal spreads be adjusted during a trade?

Call diagonal spreads can be adjusted during the trade to increase credit. If the underlying stock price declines rapidly before the first expiration date, the short call option can be purchased and sold at a lower strike closer to the stock price.