A diagonal unfold consists of two choices with totally different expirations and strike costs.
The 2 choices might be each put choices or they are often each name choices.
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Right here is an instance of two name choices on SPY that create the diagonal unfold:
Date: Oct 10, 2025
Worth: SPY @ $653
Promote one contract Oct 24 SPY $663 name @ $4.98Buy one contract Oct 31 SPY $665 name @ $6.17
Web Debit: -$119.50
As a result of we offered a name choice for $498 and purchased another choice for $617, the online debit paid for the unfold is $119 and a few change.
The danger graph of the diagonal is proven under.
The strong curve line is the revenue graph in the present day.
Additionally it is referred to as the T+0 line (the present time plus zero days prematurely).
The revenue graph on October 24 is proven within the dotted line, which outlines the “tent” form of the diagonal – October twenty fourth is the sooner expiration of the 2 choices expirations.
The choice that was offered is at all times the one with the sooner expiration date.
On this case, the $663 name choice expires in two weeks on October 24.
We name this the brief choice as a result of we’re promoting the choice.
The $665 name choice is the lengthy choice that we’re shopping for.
It has an expiration on October 31, which is one week after the brief choice’s expiration.
The form of the diagonal expiration threat graph appears to be like very very similar to the form of a calendar threat graph, the place the height revenue might be a lot bigger than the most loss.
Besides that the diagonal’s threat graph shouldn’t be as symmetrical because the calendar.
It’s skewed to 1 aspect.
On this case, there’s extra threat to the upside than the draw back.
If SPY have been to go to a really excessive worth by the expiration of the brief choice, the loss may very well be round $260 primarily based on studying the chance graph proven under, the place I’ve slid the expiration slider all the way in which to the best to indicate the revenue curve at expiration.
The precise quantity of the loss shouldn’t be deterministic forward of time.
As a result of on the time of the expiration of the brief choice, it’s not doable to know the way a lot exterior time worth remains to be left within the lengthy choice.
If SPY crashes and is at a really low worth at expiration, then each name choices might be out of the cash and expire nugatory.
In that case.
The utmost loss if the market crashes is the debit paid initially.
On this case, it’s $119.50.
4 Ideas For Higher Iron Condors
Think about one other investor who initiated a calendar unfold on the similar time and expiration dates.
Within the calendar unfold, each the brief and lengthy choices have the identical strike worth.
On this case, we use the $665 strike worth for each.
Date: Oct 10, 2025
Worth: SPY @ $653
Promote one contract Oct 24 SPY $665 name @ $4.10Buy one contract Oct 31 SPY $665 name @ $6.17
Web Debit: -$207
Instantly after filling the calendar unfold, the investor initiates a bear name unfold for the October twenty fourth expiration…
Date: Oct 10, 2025
Worth: SPY @ $653
Promote one contract Oct 24 SPY $663 name @ $4.98Buy one contract Oct 24 SPY $665 name @ $4.10
Web Credit score: $88
What’s attention-grabbing is that these two trades, mixed, are equal to a diagonal unfold.
As a result of the bear name unfold order includes shopping for again the Oct 24 SPY $665 name that was offered within the calendar order, each trades happen on the $4.10 worth.
Therefore, that choice cancels out, leaving solely these two choices:
Purchase one contract Oct 31 SPY $665 name @ $6.17Sell one contract Oct 24 SPY $663 name @ $4.98
These are precisely the 2 choices on the diagonal.
Clearly, if that was the intent, one ought to have positioned a single order as a diagonal as an alternative of two orders to avoid wasting on transaction prices and slippage.
In the event you sum the -$207 debit for the calendar with the $88 credit score for the bear name unfold, the online debit is -$119, which is about the identical because the debit for the diagonal.
The choices Greeks from the calendar and bear name spreads add as much as the identical Greeks because the diagonal.
Simply as a tough gauge of delta, the current-day revenue curve exhibits the calendar is bullish and can profit if the worth of the underlying rises.
And the bear name unfold is bearish.
In the event you mix the 2, they hedge one another and lead to a delta-neutral curve much like that of the diagonal.
The diagonal is only a calendar with an embedded vertical unfold.
In our specific instance, the decision diagonal is equal to a name calendar with a bear name unfold.
We hope you loved this text on the choices diagonal unfold.
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Disclaimer: The data above is for academic functions solely and shouldn’t be handled as funding recommendation. The technique offered wouldn’t be appropriate for buyers who aren’t conversant in trade traded choices. Any readers on this technique ought to do their very own analysis and search recommendation from a licensed monetary adviser.
