Stock Market · Option Strategies

Diagonal spread

A diagonal spread combines aspects of both calendar and vertical spreads. You buy a longer-dated option at one strike and sell a shorter-dated option at a different strike.

Construction

Example: Nifty at 22,000, moderately bullish.

• Buy 21,800 call expiring next month @ ₹350 (ITM, longer dated)
• Sell 22,200 call expiring this week @ ₹120 (OTM, near-term)
• Net debit: ₹350 − ₹120 = ₹230

Why it's flexible

Unlike a calendar (same strike) or a vertical (same expiry), the diagonal allows you to choose BOTH strike AND expiry for each leg independently. This creates enormous flexibility in constructing a payoff profile that fits your view.

The sold near-term option generates income. You can sell a new near-term option each week against the same long option. Similar to writing covered calls repeatedly.

> Think of it as a 'wheel strategy for options': own a long-dated option, sell short-dated options against it repeatedly to reduce your cost basis.

Poor man's covered call

The most popular diagonal: buy a deep ITM long-dated call (high delta, behaves like owning the stock) and sell short-dated OTM calls against it. This mimics a covered call with far less capital.

Diagonal spreadcalendar + vertical, maximum flexibility, income-generating wrapper

Risk

If the underlying moves sharply against you, the short option losses can exceed gains on the long option temporarily.

Takeaway. Diagonal spread uses different strikes AND different expiries. The "poor man's covered call" uses a deep ITM long-dated call plus short OTM calls sold repeatedly for income, a capital-efficient strategy.