Diagonal Spread and Double Diagonal Spread

We’ve already explored two foundational option spread strategies Vertical Spreads and Horizontal Spreads. 

• A Vertical Spread involves buying and selling options of the same expiry and same type (Call or Put), but at different strike prices. It’s called “vertical” because the strike prices are stacked vertically in the option chain. 

• A Horizontal Spread, on the other hand, involves buying and selling options of the same strike price and type, but with different expiry dates. 

Now, let’s explore a hybrid of both the Diagonal Spread. 

What Is a Diagonal Spread? 

A Diagonal Spread is an options strategy where a trader simultaneously buys and sells Call or Put options on the same underlying, but with different strike prices and different expiration dates. 

• This strategy blends the structure of a vertical and a horizontal spread—hence, the name “diagonal.” 

• Depending on the setup, it can be bullish or bearish in nature. 

• It is also referred to as a modified calendar spread due to its use of multiple expiries. 

Construction of a Diagonal Spread 

A Diagonal Spread can be constructed using either Call or Put options, but always with: 

• The same type of option (Call or Put) 

• Different strike prices 

• Different expiration dates 

Example – Call Diagonal Spread: 

Sell: 17800 CE (near expiry – November 3) 
Buy: 18000 CE (far expiry – November 24) 

This creates a bullish diagonal spread with a defined risk and a potential for profit if the market trades near the short strike at expiry. The area under the tent in the payoff graph highlights where the strategy is profitable. 

Example – Put Diagonal Spread: 

Sell: 17800 PE (near expiry – November 3) 
Buy: 18000 PE (far expiry – November 24) 

Again, the margin requirement is relatively low, and the potential return can be high—but note, returns fluctuate as market conditions change. 

Types of Diagonal Spreads 

Diagonal spreads offer more flexibility compared to vertical or horizontal spreads. You can alter the directional bias and risk profile by choosing different combinations of: 

• Calls vs. Puts 

• Strike prices 

• Expiry dates 

Some common variations include: 

• Debit or Credit Diagonal Spreads 

• Bullish or Bearish Diagonal Spreads 

Most traders choose to close the trade when the shorter-dated option expires. However, many advanced traders choose to roll the short option forward replacing it with another short option of the same strike but with a later expiry. 

Diagonal spreads are typically structured as debit spreads, where the long leg is farther-dated, and the short leg is nearer expiry. This helps lower the cost while maintaining a defined directional view. 

How a Diagonal Spread Works 

A Diagonal Spread performs best when the underlying asset closes near the strike price of the short option at expiry. 

• The near-expiry short option tends to lose value quickly (theta decay). 

• Traders usually hold or sell the long-dated leg depending on market direction and remaining extrinsic value. 

• Some traders prefer to roll the short leg into another expiry while holding the longer leg, effectively turning it into a rolling diagonal spread. 

Double Diagonal Spread 

A more advanced variation of the diagonal spread is the Double Diagonal Spread. 

This strategy can be understood in two ways: 

1. A combination of a far-expiry long strangle and a near-expiry short strangle 

2. A blend of a Call Diagonal Spread and a Put Diagonal Spread 

It is a net debit strategy with limited risk and profit potential. The trade benefits when the underlying expires near one of the short strikes. 

Construction of a Double Diagonal Spread 

Here’s how a Double Diagonal Spread is built: 

• Buy an OTM Put of farther expiry 

• Sell an OTM Put of nearer expiry 

• Sell an OTM Call of nearer expiry 

• Buy an OTM Call of farther expiry 

Example Setup: 

Sell: 18000 CE (Nov 3) and 17600 PE (Nov 3) 
Buy: 18400 CE (Nov 24) and 17200 PE (Nov 24) 

This setup creates two “peaks” in the payoff graph, where the maximum profit is realized if the market closes at or near the strike prices of the sold options on expiry. 

Breakeven in Double Diagonal Spread 

Breakeven exists on both sides of the strategy: 

• Call Side Breakeven: Between the near-expiry short Call and the far-expiry long Call 

• Put Side Breakeven: Between the near-expiry short Put and the far-expiry long Put 

Exact breakeven levels are complex to calculate, as they depend heavily on volatility and the pricing of the long legs. This is what makes double diagonals more nuanced than simple short strangles or vertical spreads. 

Conditions for Maximum Profitability 

Diagonal and Double Diagonal Spreads work best in environments with: 

• Low to moderate volatility at the time of entry 

• Stable or range-bound price movement 

These strategies benefit from: 

• Time decay on the short legs 

• Volatility expansion on the long legs 

However, they are negatively impacted by a drop in volatility after entry. 

Conclusion 

Diagonal and Double Diagonal Spreads are defined-risk strategies offering limited reward, but they provide flexibility in both directional view and volatility exposure. 

They are ideal for traders who expect minor price movement but want to benefit from theta decay and volatility shifts. With platforms like m.Stock, executing such complex strategies becomes more accessible to retail traders, helping them trade smart with efficient capital use.