   12: The Diagonal Spread Strategy Strategy: Diagonal spread Summary: This is called a Diagonal Spread, because it is a combination of a calendar spread and a Vertical Spread. A Calendar Spread is a relatively delta neutral strategy, in that the money is made not in the movement of the underlying stock but with time value decay as the short options expire. A Vertical Spread is a direction play, in that you are betting that the underlying stock will either decrease or increase in value (bear and bull vertical spreads). In combining the two, you are benefiting from the decrease in time value in the short call, while still benefiting from a rise or fall of the stock. Notice the more complex profit loss pattern in the graph below. Because the two options used in this spread have different expiry dates, the long call does not increase in value as quickly as the short call decreases in value as the stock rises, so you can lose money if the stock goes to far in either direction.  Figure 1: Jan 2001/Jan 2002 55/65 Diagonal CALL Spread on XYZ Example:
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