Welcome to Article 6 of the Learn Options Series, where we introduce time-based strategies that add another layer of control and opportunity to your stock options education. These setups go beyond simple directional trades by incorporating the powerful element of time decay to your advantage.
What Are Calendar and Diagonal Spreads?
Calendar Spreads: Same strike, different expirations
Both are ideal for traders who want to benefit from time decay (Theta) and changes in volatility (Vega).
When to Use It:
You want to benefit from faster time decay in the short-term option
Sell a near-term option
Buy a longer-term option (same strike)
Example: Stock ABC trades at $60.
Buy 1-month $60 call for $2.50
Goal: The stock remains close to $60 by the short option’s expiration
Short option decays faster → You profit as long as the stock stays near the strike
Diagonal Spreads
You expect directional movement and want to take advantage of time decay
Structure:
Buy a longer-term option at a different strike (usually in the direction of your bias)
Example: Stock XYZ is at $55.
Buy 1-month $60 call for $2.30
Goal: Stock rises toward—but not far beyond—$57 in the near term
Combines the Vega benefit of long-dated options with the Theta decay of short-dated options
Pros of Calendar and Diagonal Spreads in Stock Options Education
Volatility Play: A rise in implied volatility benefits these strategies
Strategic Flexibility: You can roll or adjust based on movement
Rapid Movement Can Hurt: These are best when the stock doesn’t move too aggressively
Liquidity Considerations: Rolling requires active management
Calendar and diagonal spreads help you take your options trading beyond simple buying or verticals. By understanding how time, volatility, and price interact, you’ll begin building strategies that thrive in more nuanced market conditions.
Coming up next in the Learn Options Series: Advanced Option Spreads – Iron Condors, Butterflies, and Beyond.
Stay tuned with ForexLive.com (evolviong to investingLive.com later this year), where we continue to deliver clear, strategic, and practical investing education for real-world traders and investors.
This article was written by Itai Levitan at www.forexlive.com. Read More Details
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