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A Diagonal Call Spread is a type of options strategy that combines elements of both vertical and calendar spreads. It involves buying and selling call options with different strike prices and different expiry dates. These spreads can be tailored to suit either a bullish or bearish view on the market. Depending on how the legs are structured, traders can use them to benefit from gradual directional movement while also reducing overall premium costs or generating upfront income.
The reason it’s called “diagonal” is pretty intuitive if you’ve ever looked at an options chain. In an options chain, strike prices are listed vertically and expiration dates are listed horizontally. So, when a trader selects two options with different strike prices and different expiry dates, they’re effectively moving diagonally across that grid, from one point in the top left, to another in the bottom right (or vice versa). That’s where the term "diagonal spread" comes from.
Now, there are two types of diagonal call spreads:
- Diagonal Bull Call Spread
- Diagonal Bear Call Spread
Let’s take an example to understand each type and look at their profit and loss scenarios.
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Diagonal Bull Call Spread
A Diagonal Bull Call Spread is an options strategy used when a trader generally expects a rise in the price of an asset. It involves buying a long-dated in-the-money call option and simultaneously selling a near-dated at-the-money at a higher strike price. The idea is to benefit from the directional move while also reducing the cost of the longer-term call by collecting premium from the short-term one. Let’s understand it with an example. Suppose, Nifty is trading at 23,100 points.
| Action |
Option Type (Expiry) |
Strike Price |
Premium Paid / Collected (₹) |
| Sell |
Call Option (25 April 2025) |
23,100 |
180 (collected) |
| Buy |
Call Option (10 May 2025) |
23,000 |
250 (paid) |
Net Premium Paid: ₹250 - ₹180 = ₹70 (paid)
Breakeven Point: 23,100 − 70 = ₹23,030
Profit/Loss Scenarios (Lot size = 50)
Maximum Profit:
Occurs when Nifty expires just above the short strike (23,100) on 25 April, allowing you to pocket most of the premium from the short call while still holding the long-dated call.
Max Profit = (23,100 − 23,000 − 70) × 50 = ₹1,500
Maximum Loss:
Happens if NIFTY expires below 23,000, both options lose value, and you lose the premium paid.
Max Loss = 70 × 50 = ₹3,500
Diagonal Bear Call Spread
A Diagonal Bear Call Spread is an options strategy used when a trader expects the market to either stay flat or decline mildly. It involves selling a near-term at-the-money call option and buying a longer-term out-of-the-money call option. The goal here is to generate upfront income from the premium collected on the short call while limiting risk with a protective long call. This strategy works best in a moderately bearish market where the price stays below the short strike by expiry. Let’s understand it with an example. Suppose, Nifty is trading at 23,000 points.
| Action |
Option Type (Expiry) |
Strike Price |
Premium Paid / Collected (₹) |
| Sell |
Call Option (25 April 2025) |
23,000 |
210 (collected) |
| Buy |
Call Option (10 May 2025) |
23,100 |
140 (paid) |
Net Premium Received: ₹210 (collected) – ₹140 (paid) = ₹70 (credit)
Breakeven Point: Breakeven = 23,100 − 70 = ₹23,030
Profit/Loss Scenarios (Lot size = 50):
Maximum Profit:
Occurs if Nifty stays below 23,000 by the near-term expiry. In this case, the short call expires worthless, and you retain the net premium.
Max Profit = ₹70 × 50 = ₹3,500
Maximum Loss:
If Nifty rises sharply above 23,100, both options are in-the-money, but losses are capped due to the long call.
Max Loss = (23,100 − 23,000 − 70) × 50 = ₹1,500
Wrapping Up
Diagonal call spreads offer a flexible way to trade directional market views while balancing risk and reward. Whether you're slightly bullish or bearish, these strategies allow you to benefit from time decay, volatility shifts, and directional moves, all in one setup. However, since they involve multiple legs with different expiries, they require careful monitoring and are best suited for traders who have a good understanding of options pricing and behavior. If used wisely, diagonal spreads can be a powerful addition to your options trading toolkit.
