What's a Diagonal Spread?

In derivatives trading, the term diagonal spread is applied to an options spread position that shares features of both a calendar spread and a vertical spread. It is established by simultaneously buying and selling equal amount of option contracts of the same type but with different strike prices and expiration dates.

Is diagonal spread profitable?

The maximum profit potential of a short diagonal spread with calls is equal to the net credit received less commissions. If the stock price falls sharply below the strike price of the short call, then the value of the spread approaches zero; and the full credit received is kept as income.

How does a diagonal call spread work?

A Diagonal Spread is constructed by purchasing a call/put far out in time, and selling a near term put/call on a further OTM strike to reduce cost basis. The trade has only two legs, but it gives the effect of a long vertical spread in terms of directionality, and a calendar spread in terms of its positive vega.