Diagonal Spread Calculator

A diagonal spread buys a later option and sells a nearer option at a different strike. It combines a directional view with income from the short leg. Each leg has its own contracts, so you can model ratios like 2 long : 1 short.

How a diagonal spread works

  • Call diagonal (bullish): buy a later expiry call, sell a nearer expiry call at the same or a higher strike.
  • Put diagonal (bearish): buy a later expiry put, sell a nearer expiry put at the same or a lower strike.
  • Net debit = long legs − short legs. With long contracts at least equal to short contracts, that is your max loss.
  • Best case: the stock moves toward the short strike slowly, the short option expires worthless, and the long keeps going to your target.

The calculator values a short leg that expires before your target date at its intrinsic value on the way to your target, then reprices the long leg at the target.

Example: a 2:1 call diagonal

Stock at $100. Buy 2 of the 60 day $100 calls at IV 38%, sell 1 of the 30 day $110 call at IV 40%. Net debit about $11.47 per unit, so one unit costs $1,147.

If the stock reaches $110 the day before the short call expires, and IV drops 10%, the unit is worth about $21.62: a profit of about $1,014, or 88% ROI. The short call then expires and the two long calls stay open for more upside.

The target test says Realistic: $110 in 29 days is 0.89 standard deviations.

Why I use 2:1 diagonals

A diagonal is one of the six structures I compare on every trade in my own book. I usually run it at 2 long : 1 short:

  • The short call pays for part of the cost, like a vertical spread.
  • Unlike a vertical, the extra long call keeps the upside open if the stock runs past the short strike.
  • If the short expires worthless, the remaining longs are cheaper than if I had bought them alone.

I compare it with a long call and a vertical on the same target and keep the one with the best mix of ROI at the target and value on a near miss. That process is part of the Constellation Method.

The poor man's covered call

A poor man's covered call is a call diagonal at 1:1, with a deep in the money long call far out in time (often a LEAPS) and a short out of the money call each month. It acts like a covered call for a fraction of the cost of 100 shares. Set the long strike well below the stock price, the long expiry many months out, and both contracts to 1.

FAQ

What is a diagonal spread? An options spread with two different expiries and two different strikes: buy the later option, sell the nearer one. It is directional, with income from the short leg.

What is the difference between a calendar and a diagonal spread? A calendar uses the same strike for both legs. A diagonal uses different strikes, which adds a directional bias.

What is a poor man's covered call? A call diagonal with a deep in the money, long dated call bought and a short term out of the money call sold, used as a cheaper substitute for a covered call.

What happens when the short leg expires? If it expires worthless, you keep the long leg and can sell another short option or hold. If it is in the money, you close or roll it to avoid assignment.

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Educational tool only. Not investment advice. Prices are Black Scholes estimates, not live quotes. See the Disclaimer.