### What is a Diagonal Spread

A diagonal spread is an options strategy established by simultaneously entering into a long and short position in two options of the same type (two call options or two put options) but with different strike prices and different expiration dates.

This strategy can lean bullish or bearish, depending on the composition of the options.

### BREAKING DOWN Diagonal Spread

This strategy is called a diagonal spread because it combines a horizontal spread, also called a time spread or calendar spread, which represents the difference in expiration dates, with a vertical spread, or price spread, which represents the difference in strike prices. An example of a diagonal spread is the purchase of a December $20 call option and the sale of an April $25 call.

The names horizontal, vertical and diagonal spreads refer to the positions of each option on an options exchange quote board. Options are listed in in a matrix of strike prices and expiration date. Therefore, options used in vertical spread strategies are all listed in the same vertical column. Options in a horizontal spread strategy are listed in the same horizontal row.

Options used in diagonal spreads are in different rows and columns. Their quotes are diagonally arranged on the quote board.

### Types of Diagonal Spreads

Because there are two factors for each option that are different, namely strike price and expiration date, there are many different types of diagonal spreads. They can be bullish or bearish, long or short and utilize puts or calls.

Most diagonal spreads refer to long spreads and the only requirement is that the holder buys the option with the longer expiration date and sells the option with the shorter expiration date. This is true for call strategies and put strategies alike.

Of course, the converse is also required. Short spread require that the holder buys the shorter expiration and sells the longer expiration.

What decides whether either a long or short strategy is bullish or bearish is the combination of strike prices. The table below outlines the possibilities:

Diagonal Spreads | Diagonal Spreads | Expiration Dates | Expiration Dates | Strike Price | Strike Price | Market Option |

calls | long | sell near | buy far | sell lower | buy higher | bearish |

long | sell near | buy far | buy lower | sell higher | bullish | |

short | buy near | sell far | sell lower | buy higher | bullish | |

short | buy near | sell far | buy lower | sell higher | bearish | |

puts | long | sell near | buy far | sell lower | buy higher | bearish |

long | sell near | buy far | buy lower | sell higher | bullish | |

short | buy near | sell far | sell lower | buy higher | bullish | |

short | buy near | sell far | buy lower | sell higher | bearish |

For example, in a bullish long call diagonal spread, buy the option with the longer expiration date and with a lower strike price and sell the option with the near expiration date and the higher strike price.

### Logistics

While the typical long vertical or long calendar spread results in a debit to the account, the combinations of strikes and expirations may result in either a debit or a credit.

Also, the simplest way to use a diagonal spread is to close the trade when the shorter option expires. However, many traders "roll" the strategy, most often by replacing the expired option with an option with the same strike price but with the expiration of the longer option.