# Diagonal Spreads

> A diagonal spread buys a longer dated option and sells a shorter dated one at a different strike. Learn how it works, the poor man's covered call and its risks.

Source: https://learn.tradelabsai.com/options/diagonal-spreads/  
Track: Options · Level: Advanced · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Diagonal Spreads", https://learn.tradelabsai.com/options/diagonal-spreads/

A diagonal spread combines features of a vertical spread and a calendar spread. You buy an option with a later expiration and sell an option with an earlier expiration at a different strike. Diagonals let traders build a directional bias into a time decay trade. The best known version, often called the poor man's covered call, uses a long dated in the money call as a substitute for shares and sells short dated calls against it for income.

## Construction

| Leg | Expiry | Strike |
|---|---|---|
| Buy | Longer dated | One strike |
| Sell | Shorter dated | A different strike |

- **Bullish call diagonal:** buy a longer dated lower strike call, sell a shorter dated higher strike call.
- **Bearish put diagonal:** buy a longer dated higher strike put, sell a shorter dated lower strike put.

## How it makes money

- **Time decay:** the short near term option decays faster than the long option. See [Theta](https://learn.tradelabsai.com/options/theta/).
- **Direction:** the long option usually has a higher delta than the short, so the position benefits from moves towards the short strike. See [Delta](https://learn.tradelabsai.com/options/delta/).
- **Volatility:** the long option has more vega, so rising implied volatility helps. See [Vega](https://learn.tradelabsai.com/options/vega/).
- **Repeated income:** after each short option expires, a new one can be sold against the same long option.

## The poor man's covered call

A covered call requires owning 100 shares. A poor man's covered call replaces the shares with a deep in the money long dated call (often 0.70 to 0.85 delta, expiring in 6 to 18 months) and sells short dated out of the money calls against it.

**Example: Covered call vs poor man's covered call**
A stock trades at $100.

- **Covered call:** buy 100 shares ($10,000), sell a 30 day $105 call for $1.50.
- **Poor man's covered call:** buy a 12 month $80 call for $24.00 ($2,400, delta about 0.85), sell the same 30 day $105 call for $1.50.

If the stock is at $103 at the short call's expiry, the covered call gains $300 on shares plus $150 = $450 on $10,000 (4.5%). The diagonal's long call gains about $2.60 (roughly 0.85 delta on a $3 move, less a little time decay) plus $150: about $410 on $2,400 (17%).

If the stock falls to $85, the shares lose $1,500 (offset by $150). The long call loses about $11, roughly $1,100 (offset by $150), on a $2,400 outlay, a far bigger percentage loss.

## Key rule: avoid a net debit larger than the width

For a call diagonal, if the net debit paid exceeds the difference between the strikes, a sharp rally through the short strike can produce a loss even though you were right on direction. In the example, the width is $105 minus $80 = $25 and the net debit is $24.00 minus $1.50 = $22.50, so a rally is still profitable.

## Diagonal vs calendar vs vertical

| Spread | Same strike | Same expiry | Main driver |
|---|---|---|---|
| Vertical | No | Yes | Direction |
| Calendar | Yes | No | Time decay and volatility |
| Diagonal | No | No | Direction plus time decay |

See [Vertical Spreads](https://learn.tradelabsai.com/options/vertical-spreads/) and [Calendar Spreads](https://learn.tradelabsai.com/options/calendar-spreads/).

## Managing a diagonal

- **Roll the short option** each cycle, choosing a strike above the current price for a bullish diagonal.
- **If the stock rallies past the short strike,** roll the short call up and out, or close the whole spread.
- **If the stock falls,** you may sell lower strike calls, but avoid selling below the level that locks in a loss if called.
- **Watch the long option's time left;** roll it to a later expiry before its time decay accelerates.

## Risks

- **Large declines:** the long option can lose much of its value.
- **Sharp rallies:** profit is capped until the short option is rolled.
- **Volatility collapse** reduces the long option's value.
- **Early assignment** of the short option. See [Exercise and Assignment](https://learn.tradelabsai.com/options/exercise-and-assignment/).
- **No dividends:** unlike shares, the long call does not receive dividends.

## Frequently asked questions

### What is a diagonal spread?

An options spread that buys and sells options of the same type with different strikes and different expirations.

### What is a poor man's covered call?

A diagonal spread that buys a deep in the money long dated call and sells short dated out of the money calls against it, imitating a covered call with less capital.

### Is a diagonal spread bullish or bearish?

It can be either. A call diagonal with a lower long strike is bullish; a put diagonal with a higher long strike is bearish.

Next, learn to profit from a range with the [Iron Condor](https://learn.tradelabsai.com/options/iron-condor/).

## Continue learning

- Next lesson: [Iron Condor](https://learn.tradelabsai.com/options/iron-condor/)
- Previous lesson: [Calendar Spreads](https://learn.tradelabsai.com/options/calendar-spreads/)
- Related: [Calendar Spreads](https://learn.tradelabsai.com/options/calendar-spreads/): A calendar spread sells a near term option and buys a longer term option at the same strike. Learn how it profits from time decay and volatility, with examples.
- Related: [Covered Call](https://learn.tradelabsai.com/options/covered-call/): A covered call sells a call against shares you own to collect premium. Learn the payoff, how to pick strikes, the trade offs and when the strategy works best.
- Related: [Vertical Spreads](https://learn.tradelabsai.com/options/vertical-spreads/): A vertical spread buys and sells options of the same type and expiry at different strikes. Learn debit vs credit spreads, the four types and how to choose widths.
- Related: [Theta](https://learn.tradelabsai.com/options/theta/): Theta measures how much an option loses in value each day as time passes. Learn how decay speeds up near expiry and why sellers collect what buyers pay.
- Related: [Delta](https://learn.tradelabsai.com/options/delta/): Delta measures how much an option's price moves for a $1 move in the underlying. Learn delta for calls and puts, delta as a hedge ratio and as a rough probability.