O'Reilly logo

The Complete Guide to Option Strategies: Advanced and Basic Strategies on Stocks, ETFs, Indexes, and Stock Indexes by Michael D. Mullaney

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

CHAPTER 18
Diagonal Spread
A diagonal spread strategy consists of options with different strike prices and expiration dates. To illustrate basic principles, this chapter will address a diagonal spread in which one option is at-the-money and another option is out-of-the-money, where an equal number of options are bought as are sold. Examples are presented showing results at the expiration date of the near-term option. This chapter will cover long and short diagonal spreads.

OVERVIEW

A diagonal is a spread with different strike prices and different expiration dates, such as buy one XYZ February 100 call and sell one XYZ March 110 call. A diagonal consists of either all call or all put options. There can be a large number of variations of a diagonal spread, so each should be analyzed separately to determine the risks and rewards. It is difficult to generalize about the characteristics of a diagonal spread as you can with other spread strategies. However, for the purposes of this book, it is assumed that a diagonal spread behaves mostly like a calendar spread, which was analyzed in Chapter 17.
Like a calendar spread, a diagonal spread can take advantage of near-term time decay relative to longer-term time decay or longer-term time decay relative to near-term time decay. A diagonal spread can consist of the purchase of a call (or put) option and the simultaneous sale of a call (or put) option with different strike prices and expiration dates. Likewise, a diagonal spread can consist ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required