Diagonal Spread Options Explained
Diagonal spread options explained. Learn setup, strike selection, time decay, assignment risk, and how diagonals compare with calendars or PMCCs.
Frequently asked questions
Is a diagonal spread bullish or bearish?
It can be either, depending on whether you build it with calls or puts and how the strikes are positioned. Many retail examples are mildly bullish call diagonals, but the structure itself is flexible.
How is a diagonal different from a PMCC?
A PMCC is often a specific bullish call diagonal that uses a longer-dated in-the-money call as a stock substitute and sells shorter-dated calls against it. Not every diagonal is designed to function like a covered call replacement.
Can a diagonal spread be hurt by IV changes?
Yes. Like calendars, diagonals have exposure to how implied volatility changes across expirations. The long back-month option may retain value better than the short leg, but both options can reprice at the same time.
What should I watch before entering a diagonal spread?
Check liquidity in both legs, strike distance, days to expiration, assignment risk on the short option, and whether your planned management rules still make sense if the underlying moves faster than expected.