Definition
Diagonal Spread
A diagonal spread combines different strikes and different expiries, blending the features of a vertical and a calendar spread.
You buy a longer-dated option at one strike and sell a shorter-dated option at a different strike — diagonal because it moves across both strike and time. It captures theta decay from the short near leg while keeping directional and vega exposure through the longer leg.
Indian traders use diagonals on Nifty, Bank Nifty, and stocks to express a directional view with a financing boost from the sold short-term option, often rolling the short leg each week. Managing them needs attention to both the strike difference and the changing implied volatility between expiries.
Related terms
- VegaVega measures how much an option's premium changes when implied volatility rises or falls by 1%.
- Bull Call SpreadA bull call spread buys a lower-strike call and sells a higher-strike call to bet on a moderate rise at lower cost.
- Calendar Spread (Options)A calendar spread sells a near-term option and buys a longer-term option at the same strike to profit from time decay and volatility.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.