Options Strategy – Diagonal Calendar Spread
Diagonal Calendar Spreads are options strategies involving two strike prices and two expiration dates. It can be built with either call or put options. It allows traders to implement a directional position and minimizing the impact of time simultaneously.
Payoffs of a Diagonal Spread:
Diagonal Calendar Spreads can be implemented as follow:
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Diagonal Calendar Spread Configurations |
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| Diagonal Spreads | Diagonal Spreads | Nearer Expiration Option | Longer Expiration Option | Strike Price 1 | Strike Price 2 |
Underlying Assumption |
| Calls | Long | Sell Near | Buy Far | Buy Lower | Sell Higher | Bullish |
| Short | Buy Near | Sell Far | Sell Lower | Buy Higher | Bearish | |
| Puts | Long | Sell Near | Buy Far | Sell Lower | Buy Higher | Bearish |
| Short | Buy Near | Sell Far | Buy Lower | Sell Higher | Bullish | |
Most diagonal spreads are long spreads and the only requirement is that the trader purchases the option with the far expiry and sells the option with the shorter expiry while the strike can be inverted. This is true for both call diagonals and put diagonals alike. Indeed, the converse is also required. Short spreads require that the holder buys the shorter expiry and sells the longer expiry.
For example:
A trader decides to implement a long Put Diagonal Spread on the Eurostoxx 50:
- Sell a Dec21 2500 Put on SX5E (sell near expiry with lower strike)
- Buy a Dec22 3000 Put on SX5E (buy far expiry with higher strike)
Now, a trader decides to implement a long Call Diagonal Spread on the Eurostoxx 50:
- Sell a Mar22 4800 call on SX5E (sell near expiry with higher strike)
- Buy a Jun23 4200 call on SX5E (buy far expiry with lower strike)
