Diagonal Spread

A diagonal spread is an options strategy that involves simultaneously buying and selling options of the same type (both calls or both puts) on the same underlying asset, but with different strike prices and different expiry dates. The long leg typically has a later expiry and a strike closer to the current price, while the short leg has a nearer expiry and a different strike. The strategy profits from time decay on the short leg, volatility changes, and directional movement. Diagonal spreads are more complex than vertical or calendar spreads, offering greater flexibility in expressing nuanced market views. They are used by sophisticated options traders in Indian F&O markets who want to combine income generation with directional exposure.