What are the risks of investing in a diagonal option spread?

Long put and call diagonal spreads are defined risk in nature, where the max loss potential is the debit paid up front if the long option expires worthless. Losses prior to expiration can be seen if the stock moves in the wrong direction and the spread moves further OTM, where both options lose extrinsic value.

What are the advantages of a diagonal option spread?

Along the way, traders can continue to reduce the cost basis of the long option by rolling the short option forward in time. Diagonal spreads can be effective earnings trades if you are directionally correct, and they limit losses if you’re directionally wrong as they’re defined risk debit trades.

What is the profit target for a diagonal option spread?

The profit target for a trade like this could be anywhere from 10% to 20% of the capital at risk. On March 21, it reached $162 in profits, which is 15%. On March 23. it reached $215 in profits, nearly 20%. We hope this diagonal option spread example helps you with your trading. Trade safe!

How do you manage a diagonal spread?

Diagonal spreads combine the strategies used in vertical and horizontal spreads, i.e. they are constructed using two options with different strike prices and different expiries. One of the easiest ways to do it would be to keep everything the same in a horizontal spread and just change the strike price of one of the legs.