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

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Diagonal Bull Put Spread
Diagonal Bear Put Spread
The Bottom Line

A Diagonal Put Spread is an options strategy that combines views of both vertical spreads and calendar spreads. In this strategy, traders simultaneously buy and sell put options with different strike prices and expiration dates. Diagonal put spreads offer flexibility to traders, which enables them to express a bearish or bullish view of the market, while also benefiting from time decay and volatility shifts. The positioning of these options allows traders to manage risk while potentially making a profit from gradual price movements.
There are two main variations of diagonal put spreads:

Diagonal Bull Put Spread
Diagonal Bear Put Spread

Now, let’s take a look at both the variations, including examples to highlight how they work and their profit and loss outcomes.

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.

Action	Option Type (Expiry)	Strike Price	Premium Paid / Collected (₹)
Sell	Put Option (25 April 2025)	22,900	185 (collected)
Buy	Put Option (10 May 2025)	22,800	130 (paid)

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.

Action	Option Type (Expiry)	Strike Price	Premium Paid / Collected (₹)
Sell	Put Option (25 April 2025)	22,500	90 (collected)
Buy	Put Option (10 May 2025)	22,600	135 (paid)

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.

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