Analysis Techniques & Strategies
A Diagonal Put - Buy strategy, sometimes referred to as a Diagonal Time Spread or Diagonal Calendar Spread, involves the sale of a near-term Put option and the purchase of a far-term Put option at a higher strike.
The Diagonal Put - Buy is based on the theory that over time the value of the near-term options will erode faster than the far-term options. Maximum gain occurs at the strike price of the near term option you sell. You can elect to close the entire position at that time, or continue with the long far term option trade.
Here is an example of this option strategy:
Short 1 XYZ OCT 60 Put $3.25 you sell ($ money in)
Long 1 XYZ DEC 55 Put $2.25 you purchase ($ money out)
(Diagonal Spreads can be created using Calls or Puts)
| Risk Factor | Effect |
| Price Sensitivity [Delta] | Position benefits from a non-moving market or if the market moves higher |
| Time Decay [Theta] | Position benefits from the passage of time |
| Volatility Sensitivity [Vega] | Position benefits from a decrease in volatility |
Maximum Gain is realized on the near expiration date, at the strike price of the near option sold.
Maximum loss is limited to the difference in strike prices.