What is a diagonal spread in options trading?

The diagonal spread is a popular options trading strategy that involves the simultaneous purchase and sale of options of the same type but with different strike prices and expiration dates. This spread aims to benefit from the advantages of both vertical and calendar spreads.

Is a diagonal spread a bullish strategy?

This strategy can lean bullish or bearish, depending on the structure and the options utilized. A diagonal spread is an options strategy that involves buying (selling) a call (put) option at one strike price and one expiration and selling (buying) a second call (put) at a different strike price and expiration.

What is the difference between a vertical spread and a diagonal spread?

A vertical spread’s long and short options share the same expiration, whereas a diagonal spread’s long and short options are in different expirations. Typically, the long option has more time to expiration than the short option.

How much does a call diagonal spread cost?

In the example above, the call diagonal spread is 20 points wide, and the total entry cost for the trade is $18.30. The long option with 50dte is trading for $21, and the short option that expires in one day is trading for $1.97 and is made up of purely extrinsic value. In one day, all of that value will decay to $0.