Diagonal Spread

TL;DR: A diagonal spread combines different strikes and different expirations into one trade, giving you both directional exposure and time-decay income.

A diagonal spread is a two-leg options strategy where you buy one option and sell another at a different strike price and a different expiration date. This makes it a hybrid of a vertical spread (different strikes, same expiration) and a calendar spread (same strike, different expirations). Typically, you buy a longer-dated option and sell a shorter-dated option at a different strike, collecting premium from the short leg while maintaining directional exposure through the long leg.

The most well-known diagonal spread is the Poor Man's Covered Call (PMCC) — a bullish call diagonal where you buy a deep in-the-money LEAPS call and sell a near-term out-of-the-money call against it. But diagonals work in both directions. A bearish put diagonal involves buying a longer-dated deep ITM put and selling a near-term OTM put, profiting from a slow grind lower. The flexibility of mixing strikes and expirations lets you fine-tune your risk/reward profile — wider strike separation increases profit potential but also increases risk, while longer time between expirations gives you more premium collection opportunities.

Diagonal spreads are best suited for traders who have a moderate directional outlook and want to generate income along the way. They work well in trending markets where you expect gradual movement rather than explosive moves. The short leg benefits from theta decay, while the long leg provides a safety net and directional delta. Managing diagonals requires more attention than simpler strategies — you need to roll or close the short leg at each expiration cycle and monitor the relationship between the two legs. LeanOptions covers diagonal mechanics in detail, and ThetaCommand can help identify optimal entry points where the volatility structure favors selling near-term premium against longer-dated positions.