Put Diagonal Spread Strategy

The Put Diagonal Spread is an advanced options strategy that combines elements of both vertical and calendar spreads. It involves selling a short-term put option and buying a longer-term put option at a different strike price. Traders use this strategy to benefit from time decay, volatility shifts, and directional movement — typically with a bearish or neutral outlook.

Structure

• Sell 1 short-term put (higher strike)
• Buy 1 long-term put (lower strike)
• Both puts have different expiration dates

Profit & Loss Profile

• Max Profit: Occurs if the stock stays above the short put strike at front-month expiration
• Max Loss: Limited to spread width minus net credit (or plus net debit)
• Breakeven: Depends on timing, volatility, and long put value after short put expires

Ideal Market Conditions

• Neutral to slightly bearish short-term outlook
• Expecting increased volatility or downside movement after short put expires
• Best when implied volatility is low at entry and expected to rise

Example

A stock is trading at $100. You:

• Sell 1 put expiring in 1 week at $100 for $2
• Buy 1 put expiring in 1 month at $95 for $4

Net debit = $2. If the stock stays above $100, the short put expires worthless and the long put retains value. If the stock drops later, the long put gains further.

Risks & Considerations

• Early assignment risk on short put if in-the-money
• Time decay works against the long put after short put expires
• Requires active management and volatility awareness