Diagonal Spread - Learn About the Hybrid Between Vertical and Calendar Spreads

A diagonal spread mixes strike prices and expirations to trade directionally with limited risk. But when should you use a diagonal call spread vs. a diagonal put spread? This guide breaks it down, simply and clearly.

Key Takeaways

• A diagonal spread is an options strategy that mixes strike prices and expirations to capture directional moves while managing cost and risk. Two popular versions are the long diagonal call spread and the long diagonal put spread.
• Diagonal spreads let you express bullish or bearish views with limited risk and flexible management via rolling techniques.

What is a Diagonal Spread?

A diagonal spread is an options strategy that mixes two key elements: different strike prices and different expiration dates. It’s a hybrid between a vertical spread (which uses different strikes) and a calendar spread (which uses different expirations). This mix gives you more flexibility than either strategy on its own.

Why is it called “diagonal”? On an options chain, strike prices run vertically and expirations run horizontally. When you use different strikes and expirations, the position cuts across the grid diagonally - simple as that.

Here’s the basic structure (for the long diagonal case):

• Buy a longer-dated option with lower strike
• Sell a shorter-dated option with higher strike

The P&L chart of a typical diagonal spread will look like this:

Both legs are either calls or puts - never a mix. When you use calls, it’s called a diagonal call spread. When you use puts, it’s a diagonal put spread.

This setup allows for:

• Defined risk
• Lower cost basis (thanks to the short leg)
• Directional bias - bullish or bearish
• More flexibility to manage the position over time

A diagonal option spread can work whether you think a stock will go up or down - it just depends on which version you use. We’ll look at both types next.

How a Diagonal Option Spread Works

A diagonal spread works by combining two options with different expirations. The short leg (near-term) loses value faster due to time decay, which benefits you if the stock moves as expected. Meanwhile, the long leg (further-dated) holds value longer, especially if implied volatility rises.

• Time decay hits the short option first. This is a good thing, because you may just collect the income from the short-term option you sold and then sell another one which still expires before the long option you bought.
• The long option stays alive and can be defended. In fact, you don’t really need to apply the “rolling” strategy mentioned above, you may simply choose to keep your long option leg open.

This makes the diagonal option spread more flexible than standard vertical or calendar spreads.

Long Diagonal Call Spread

A long diagonal call spread is a slightly bullish setup built with call options at different strikes and expirations. It’s a popular way to stay directional while reducing cost.

Profit Potential

Max profit happens when the stock price lands right at the short call’s strike on its expiration date. In that case:

• The short call expires worthless
• The long call still holds value - both intrinsic and extrinsic
• You keep the credit from the short call and benefit from the long call’s move

If implied volatility remains high in the longer-term option, that adds more upside. That’s one of the unique advantages of a diagonal option spread over a standard vertical.

Loss Potential

Your max loss only occurs if the stock drops sharply and both options lose value. Fast upward moves can also hurt - your short call gains value fast while the long call may not keep up. This may either end up capping your gains or give you a rather limited loss (as we will show you in our example).

Rolling the short call (closing and reopening it further out) is a common way to defend the position and buy more time.

Example - Long Diagonal Call Spread

Let’s say you’re bullish on NVDA, trading at $101.49. You open a long call diagonal spread by:

• Buying a $101 call expiring in 4 weeks
• Selling a $103 call expiring in 3 weeks

Here’s the P&L graph of the trade (take from our options screener):

This graph shows your potential profit/loss at the short option’s expiration. In this case:

• Max loss is about $200
• Max gain is over $200 if NVDA closes at $103 (your breakeven point is $98.73 on the left)
• If NVDA rallies hard, you’d still only lose around $2. You could also build your strategy differently in order to have a mild profit on the right-hand side of the trade.

This kind of diagonal spread helps you stay bullish without risking much if the stock takes off too quickly.

Long Diagonal Put Spread

A diagonal put spread is a setup where you want the stock to drift downward-not crash-while keeping risk defined and cost controlled.

Profit Potential

Your best-case scenario is a slow, steady decline in the stock’s price toward the short put’s strike. In that case:

• The short put expires worthless, so you keep the premium
• The long put gains intrinsic value
• You benefit from both price movement and time decay

If implied volatility stays elevated in the longer-term option, the value of the spread can increase further. This is where diagonal option spreads shine over simple vertical spreads.

Loss Potential

Max loss happens if the stock drops too far, too fast. In that case, the short put gains too much intrinsic value before your long put kicks in. This creates temporary loss (until expiration), but not necessarily max loss unless held. You also face risk if the stock rallies quickly. But just like with the diagonal call spread, that usually results in a small capped loss or even a small gain.

To manage it:

• Roll the short put to a later date or lower strike
• Reduce cost basis and extend the life of the trade

Example - Long Diagonal Put Spread

Let’s say SPY is trading at $526.41 and you’re expecting a minor pullback. You set up a long diagonal spread by:

• Selling the $473 put expiring in 4 weeks
• Buying the $460 put expiring in 5 weeks

Here’s the P&L at first expiration:

From this setup:

• Max risk is around $1,300 if SPY drops below $466.77
• Max gain is $300+ if SPY lands at $473
• If SPY moves higher, you still make about $20

Notice how losses taper off-this setup gives you a “soft landing” on sharp drops. That’s one of the key advantages of a diagonal put spread over more rigid strategies.

Short Diagonal Spread - The Call and the Put Case

So far, we focused on the long diagonal spreads, but we have not given you the whole picture. A short diagonal spread flips the logic of the long version. You sell the longer-dated option and buy the shorter-dated one, aiming to collect premium in a defined-risk setup.

Short Diagonal Call Spread

This version is slightly bearish. You expect the stock to stay below the short call’s strike or even drift lower. You can open it like this:

• Sell a longer-term call at a lower strike
• Buy a shorter-term call at a higher strike
• Established for a net credit

If the stock drops, the long call expires worthless and the short call loses value - you keep the credit. Your risk peaks if the stock lands near the long call’s strike at expiration, where the long leg loses all value and the short call retains some. Rolling the short leg is key to staying in control.

Short Diagonal Put Spread

This setup leans bullish. You expect the stock to stay above the short put’s strike or move higher. You can open it as follows:

• Sell a longer-term put at a higher strike
• Buy a shorter-term put at a lower strike
• Also entered for a credit

If the stock rises, the long put expires worthless, and the short put decays - you keep the credit. Like the call version, risk is highest when the stock settles near the long put’s strike on its expiration.

Both short diagonal spreads:

• Work best when implied volatility is high in the short leg
• Offer limited risk and capped reward during the duration of the shorter-term expiration.
• Should be closed or adjusted before the short leg becomes naked

Use them when you want to take a directional stance, collect premium, and define your risk - but you need to actively manage the position, especially after the short leg remains open.