Diagonal spread
Definition · Level 3 · Spreads & short options
Keep reading with Tradecraft
Without a subscription, you can read three definitions every 30 days. Tradecraft explains all 988 terms and strategies, with the lessons that teach them, flashcards that come back before you forget, quizzes and a payoff lab.
A calendar with two different strikes: sell a near-term option, buy a longer-dated one at another strike. The long option outlives the short one and covers it.
Example
Sell the 30-day 105 call, buy the 1-year 80 call.
Where Tradecraft teaches it
Level 3 · Spreads & short options, in the lesson “Diagonals & the poor man’s covered call”: A calendar with two strikes, and a long-dated deep in-the-money call used instead of shares.
Related terms
- Debit below widthThe guideline for a poor man’s covered call: keep the net debit below the gap between its two strikes, so that a big rally still leaves a profit.
- Diagonal Spread – Short leg expires firstSell a near-term option and buy a longer-term one at a different strike: part calendar, part vertical.
- Poor man’s covered callDiagonal that replaces 100 shares with a deep in-the-money long-dated call and sells short-dated out-of-the-money calls against it.
- Back-spread danger zoneWhere a back spread loses the most at expiry: the stock sitting at the long strike.
- BodyThe middle strike of a butterfly, short in a long fly: where a long fly earns the most at expiration.
- Breakeven win rateHow often a trade must win just to net zero, treating each outcome as a full win or a full loss: max loss ÷ (max profit + max loss).