What is a diagonal spread?

A diagonal spread is a modified calendar spread involving different strike prices. It is an options strategy established by simultaneously entering into a long and short position in two options of the same type—two call options or two put options—but with different strike prices and different expiration dates.

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.

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.