What is a Diagonal Put Spread? Strategy, Setup & Payoff Explained

Diagonal Bull Put Spread

A Diagonal Bull Put Spread is an options strategy used when the trader has a mildly bullish view on the market. It involves selling a near-term In-the-Money (ITM) put option and simultaneously buying a next-month Out-of-the-Money (OTM) put option. This setup aims to generate a net credit upfront while taking advantage of time decay and a gradual upward move in the underlying. Let’s understand this with an example. Assume Nifty is trading at 22,850.

Net Premium Received: ₹185 - ₹130 = ₹55 (credit)
Breakeven Point: 22,900 − 55 = ₹22,845
Profit/Loss Scenarios (Lot size = 50)

Maximum Profit:
Occurs when Nifty stays above 22,900 at expiry of the short leg.
Max Profit = 55 × 50 = ₹2,750

Maximum Loss:
Occurs if Nifty drops below 22,800 by the expiry of the long leg.
Max Loss = (22,900 − 22,800 − 55) × 50 = (100 − 55) × 50 = ₹2,250
 

Diagonal Bear Put Spread

A Diagonal Bear Put Spread is an options strategy suited for a trader with a bearish view on the market. The strategy involves buying a next-month At-the-Money (ATM) put option and selling a near-month Out-of-the-Money (OTM) put option. This setup typically results in a net premium outflow (debit) and is designed to benefit from a moderate decline in the underlying. Assume Nifty is trading at 22,600.

Net Premium Paid: ₹135 - ₹90 = ₹45 (debit)
Breakeven Point: 22,600 − 45 = ₹22,555
Profit/Loss Scenarios (Lot size = 50)

Maximum Profit: Occurs if Nifty drops close to the short strike (22,500) by the expiry of the near-month option.
Max Profit = (22,600 − 22,500 − 45) × 50 = (100 − 45) × 50 = ₹2,750

Maximum Loss: Happens if Nifty stays above 22,600 and both options lose value.
Max Loss = 45 × 50 = ₹2,250

The Bottom Line

Diagonal put spreads offer a strategic edge to options traders who want to express either a bearish or a bullish outlook. It is a risk-defined strategy that allows flexibility in trade setup and potential gains from time decay. Understanding how each variation works, Bull Put and Bear Put can help traders pick the right approach based on their market outlook and time horizon.