A diagonal spread is a stock option strategy involving buying and selling two different option holdings within the same share class at different strike prices and expiration dates to offset risk. It involves buying and selling calls and puts simultaneously and can result in gains or losses.
A diagonal spread is a stock option strategy whereby an investor chooses to buy and sell two different option holdings within the same share class at different strike prices and with different expiration dates. A diagonal spread, therefore, is based on buying and selling two calls, or buying rights, as well as buying and selling two puts, or selling rights, of the same options simultaneously.
The term diagonal spread is unique to stock options. A stock option is permission, granted by a signed contract, to the legal holder of a share or shares of the company issuing the shares to purchase the company’s shares at a specified price set forth in the option contract and within of a period of time. Stock options are purchased, in some cases earned, rights to take advantage of a stock’s future dividends if the stock’s price rises or risk that advantage if the price falls by the end of the contract’s expiration date.
A diagonal spread is designed to offset risk to the option holder by simultaneously selling and buying different option rights at a higher or lower price, also known as the strike price, and the results of which will be realized within a specified period of time that varies considerably, but is not more than one year. Put as simply as possible, a diagonal spread is similar to simultaneously betting for and against both teams in the same game.
By initiating a diagonal spread, an investor will buy and sell calls and put two different stock options at different strike prices. The exercise price is the price of a share at the time the investor signs the option contract. If the strike price is higher on the contract’s expiration date, the expiration date, and the investor has purchased a call option, then the investor has purchased the stock option at a lower price and the term of the option. Option expires at investor’s gain. Unfortunately, a diagonal extension can also have the opposite result.
Diagonal spreads imply different options, but the underlying shares are within the same class, A or B. Class A shares are common shares, available to the public, and have 1 vote per share. Class B is commonly assigned 10 votes per share and is usually reserved for the owners/founders of the issuing company so they can retain control of the company.
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