What is a diagonal spread strategy?

As you can see from the setup, a diagonal spread strategy involves buying and selling two put options or call options. These options have different expiration dates/cycles and strike prices. Who Can Use the Diagonal Spread Strategy? The diagonal spread strategy involves trading multiple options with different expiration dates and strike prices.

Can a diagonal spread trade be profitable?

A diagonal spread trade can be profitable if the spread moves ITM, or appreciates in value, prior to the expiration of the long option. The long option is the asset in the trade that you want to appreciate, and the short option reduces the cost basis on the long option.

What happens if a put diagonal spread moves ITM?

If the put diagonal spread moves ITM on a stock price selloff by the expiration of the short put option, the spread will trade for the intrinsic value difference between the long and short option, plus any remaining extrinsic value in the long option.

What is a diagonal debit spread?

Diagonal debit spreads are defined risk directional trades where profit potential depends on the directional movement of the stock price. Since the most we can lose is the debit paid up front, the monetary risk is controlled by the entry price. Let’s dig in deeper below.