Diagonal Spread

A calendar spread uses the same strike in different expirations (purely a time play). A diagonal uses different strikes in different expirations (combines time play with directional exposure). Diagonals have more directional bias built in.

A diagonal reduces your cost basis through the premium collected from the short option. It also benefits from time decay if the underlying moves toward your target gradually. The trade-off is capped upside and more management required.

If the short option is OTM, it expires worthless (good). If ITM, you may be assigned (for equity options) or have a cash settlement (for index options). Either way, you're then left with just the long option - converting to a naked long call or put.

For a properly constructed diagonal (net debit less than strike width), your maximum loss is the net debit paid. However, assignment risk on the short option can create complications with equity options. For index options (like FTSE 100), cash settlement simplifies this.

Neither is inherently better. Call diagonals are for bullish views, put diagonals for bearish views. Choose based on your directional outlook. Put diagonals may have slightly better pricing due to put skew, but call diagonals are more common due to general market bullishness.

Use a vertical spread when you have strong conviction about a move happening quickly (before single expiration). Use a diagonal when you expect a more gradual move and want to benefit from time decay along the way. Diagonals also have better vega exposure if you expect IV to rise.

Typically 100-200 points for FTSE 100 (1-3 strikes apart). Narrower spreads have lower cost but lower profit potential. Wider spreads have higher cost but higher profit potential. Match the width to your directional conviction and target price.

No. Roll only if: (1) thesis is still valid, (2) roll credit/cost is reasonable, (3) you want continued exposure. If the thesis is broken or roll costs are too high, it's often better to close the entire position. Don't roll just to avoid realizing a loss.

For equity call diagonals, if the short call is ITM near an ex-dividend date, you may be assigned early (the buyer exercises to capture the dividend). This is more likely for deep ITM short calls with little time value. Roll or close before ex-dividend date to avoid.

Yes. You can: (1) Close entirely, (2) Close the short and hold the long (directional bet), (3) Roll strikes to re-center, (4) Convert to calendar by moving short to same strike as long. The best choice depends on your updated market view.

For maximum capital efficiency, use highest delta long call you can afford (0.80+) with lowest cost short call. For better risk management, use moderate delta long (0.70-0.75) with more time and ensure strict position sizing. Never risk more than 5% of portfolio on a single PMCC.

High volatility increases vega benefit but also gamma risk. Consider: (1) Closing if profit targets met (vega gain), (2) Rolling short to further OTM (gamma protection), (3) Widening the strike difference if rolling. Don't add new diagonals in high IV - wait for normalization.

Roll when: (1) 5-7 DTE remaining, (2) short option has 15-20% of original value left, (3) roll credit is at least 50% of potential theta remaining in new month. Avoid rolling too early (leaving theta on table) or too late (gamma risk, assignment risk).

Black swans spike IV (helps vega) but can cause gap moves (hurts delta/gamma). If gap is in your direction, consider taking profit immediately (IV will crush). If against, assess whether position is within max loss. Avoid panic closes - diagonals have defined risk.

Yes. Bearish put diagonals can hedge long equity exposure. Structure: Buy ITM put LEAPS on index, sell OTM front-month puts. This provides downside protection at reduced cost (short put premium offsets long cost). Roll the short monthly while holding the long as core hedge.