What is diagonal spread?

The diagonal spread is an option spread strategy that involves the simultaneous purchase and sale of equal number of options of the same class, same underlying security with different strike prices and different expiration months.

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 an example of a bullish long call diagonal spread?

For example, in a bullish long call diagonal spread, buy the option with the longer expiration date and with a lower strike price and sell the option with the near expiration date and the higher strike price. An example would be to purchase one December $20 call option and the simultaneous sale of one April $25 call.