Diagonal Spread

A diagonal spread involves buying and selling options of the same type (both calls or both puts) with different strike prices and different expiration dates. It combines characteristics of a vertical spread (different strikes) and a calendar spread (different expirations). A common implementation is the "poor man's covered call" — buying a deep in-the-money LEAPS call and selling a near-term out-of-the-money call against it. Diagonal spreads offer more flexibility than pure vertical or calendar spreads, allowing traders to express views on both direction and time decay simultaneously. The strategy profits from the faster decay of the short-term option while the longer-term option retains value. Risk is generally limited to the net debit paid, though assignment risk on the short leg adds complexity.