2 expiries
Put Calendar Spread
Sell a near expiry put and buy a far expiry put at the same strike. Profits from time decay if the index stays near the strike, with a mild bullish lean.
Learn strategyBullish2 LegsDefined risk
Put Diagonal Spread
Sell a near expiry put and buy a far expiry put at a lower strike. A calendar with a bullish tilt that earns from decay while the index holds up.
By Team Agora Circle
Written by the Agora Circle editorial team. Educational content, explained for the Indian market. Not investment advice.
- Market outlook
- Neutral to mildly bullish. You expect the index to hold up or drift higher, not to fall hard.
- Setup
- Sell a near expiry put and buy a far expiry put at a lower strike, for a small net debit.
- Max profit
- Reached near the short strike at the near expiry, from the value left in the far put. No fixed formula.
- Max loss
- Broadly limited, because the long far put at the lower strike caps the risk of a fall.
- Breakeven
- Shifts with time and volatility because the two legs expire on different dates.
- Implied volatility
- Net long vega through the far put. Rising implied volatility generally helps.
- Time decay
- Time decay works in your favour, as the near short put decays faster than the far long put.
Strategy Overview
A put diagonal spread sells a near expiry put and buys a far expiry put at a lower strike, so the two legs differ in both strike and expiry. Placed this way, with the short put at or near the money and the long put further out in both strike and time, the structure leans neutral to bullish: it earns from the near put decaying while the lower, longer dated put caps the risk if the market falls instead.
It suits a view that the index will hold up or drift higher rather than break down. As the near expiry approaches with the index at or above the short strike, the put you sold decays toward zero while the far put you own keeps time value, and the spread works in your favour. A sharp fall is the unfriendly case, though the long lower put limits how much that can cost.
As with any calendar, the two expiries mean the payoff cannot be shown as a single expiry line, and the exact result depends on the time value and implied volatility left in the far put at the near expiry. The long far put keeps the risk of a fall broadly defined rather than open ended.
How to Set It Up
Two puts at different strikes and different expiries, net short the nearer, higher strike leg.
- 1Sell 1 put in the near expiry at or near the money, to collect fast decaying premium.
- 2Buy 1 put in a far expiry at a lower strike, which caps the downside risk and carries longer dated value.
- 3The small net debit is broadly your risk picture, and the short strike marks where the near term profit peaks.
Payoff Diagram and Example
Max Profit
Reached near the short strike at the near expiry, from the value left in the far put. No fixed formula.
Max Loss
Broadly limited, because the long far put at the lower strike caps the risk of a fall.
Breakeven
Shifts with time and volatility because the two legs expire on different dates.
This strategy uses two different expiry dates, so a single expiry payoff diagram would be misleading. The value of the longer dated leg depends on the time and implied volatility still left in it when the nearer leg expires, which a fixed expiry chart cannot show. The example and the sections below describe how the position behaves instead.
Suppose NIFTY is at 25,000 and you expect it to hold up or drift higher. You sell the near expiry 25,000 put for 130 and buy a far expiry 24,700 put for 200. The net debit is 70 points, about Rs 5,250 on a lot of 75.
If the index sits at or above 25,000 as the near expiry arrives, the short 25,000 put decays and expires near worthless, while the far 24,700 put still holds time value. You can then close the far put, or sell a fresh near put against it to keep collecting premium.
If instead the index falls hard below 24,700, the short put moves against you, but the long far put at the lower strike gains and caps the damage, keeping the loss broadly contained rather than open ended. A gentle drift up or a flat market is what the position wants.
Entering and Exiting
Enter both legs together as a spread so the net debit is fixed with no leg risk.
The near expiry is the decision point: close the whole diagonal, or roll by selling a fresh near put against the far put you still hold.
Exit if the index breaks down strongly, since the bullish tilt then works against you even with the long put cap in place.
Time Decay (Theta)
Time decay favours the position because the near short put, closer to expiry, loses time value faster than the far long put. That gap is the calendar engine underneath the bullish tilt.
The decay benefit is strongest while the index stays at or above the short strike, so a flat or slowly rising market lets you harvest it cleanly.
Implied Volatility (Vega)
The position is net long vega through the far put, so rising implied volatility generally helps. Entering when volatility is low and the far expiry can benefit from a later rise is preferable.
A drop in implied volatility deflates the far put and can hurt even on a correct neutral to bullish view, so the level of IV at entry matters, just as it does for a plain calendar.
Common Adjustments
Roll the short put at the near expiry: sell a new near put, often at a higher strike if the index has risen, to keep collecting premium against the far put.
If the index falls toward the long strike, you can roll the short put down and out, or close the spread while the long put still holds value.
If implied volatility spikes and the far put gains, closing the whole spread to bank that gain can beat waiting for the near expiry.
Synthetic Equivalent
A put diagonal is a calendar spread with a strike skew: the short near put plus a long far put at a different strike combine time decay with a directional tilt.
It is the bullish mirror of the bearish call diagonal, and a close relative of the bull put spread, trading a little premium for a longer dated protective leg and a favourable decay profile.
Pros and Cons
Pros
- Earns from time decay while the index holds up or drifts higher.
- The long lower put keeps the risk of a fall broadly defined.
- Cheaper and lower risk than an outright short put.
- Net long volatility, so a rise in implied volatility helps.
- Can be rolled repeatedly to keep harvesting premium against the far put.
Cons
- A sharp fall works against the tilt, even though the long put caps the loss.
- A fall in implied volatility hurts the long far leg.
- The two expiry payoff is harder to visualise and manage.
- Needs liquidity in two expiries, with wider spreads likely in the far month.
Frequently Asked Questions
How is a put diagonal different from a put calendar?
A put calendar uses the same strike in two expiries and is directionally neutral. A put diagonal uses different strikes as well as different expiries, which adds a directional lean. With the long put at a lower strike it leans neutral to bullish while still harvesting time decay from the near short put.
What market does this put diagonal want?
A flat or gently rising one. It profits from the near put decaying while the index stays at or above the short strike. A hard fall is the unfriendly case, though the long lower put caps how much it can cost.
Why can't a put diagonal be drawn on a single chart?
Because the two legs expire on different dates. When the near put expires, the far put is still alive with its own time value and volatility exposure, which a fixed expiry chart cannot represent. The trade is assessed at the near expiry.
Does the long far put really cap the risk on a put diagonal?
Broadly yes. The long far put at the lower strike caps the loss from a fall, unlike a naked short put. As with any calendar, a large move in implied volatility can still affect the exact figure.
How does this compare with selling a put outright?
Selling a put alone collects more premium but carries a large, open ended downside. The put diagonal gives up some of that premium to buy a longer dated lower put, which caps the downside and adds a favourable time decay dynamic, at the cost of a more complex, two expiry position.
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Learn strategyThis page is for education only. It is not investment advice, and nothing here is a recommendation to buy or sell any instrument. Options involve substantial risk, and option sellers can lose far more than the premium they receive. Please do your own research or consult a SEBI registered investment adviser before trading. Read our full disclaimer.