Predicate that you think TSLA is over-priced at $2045, so you

  1. buy a Sep 16 2022 \$300 ($= A$) put.

  2. but don't think TSLA will crash to \$400 ( $= B$) in a week, so you sell a 7DTE (Aug 28 2020) \$400 put. $A < B$. (In my original post, $A = B$ for I mistyped them).

  3. I've just described a Diagonal Spread with Puts, correct?

  4. If so, how's the red underline below correct? During the front month, I desire the stock price to be as $> B$ as possible, to maximize my profit. But during the back months, aren't I bearish? How can I possibly be "neutral to bullish"?

enter image description here


No, you are describing a long put calendar spread https://www.optionseducation.org/strategies/all-strategies/long-put-calendar-spread-(put-horizontal).

In that diagonal spread example, see that the two strikes (A & B) are different? In your example, the strikes of the two puts would be the same.

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  • $\begingroup$ Thanks. Yes, I "see that the two strikes (A & B) are different?" I've edited my post to correct this. Does my edit change your answer? $\endgroup$ – AYX.CLDR Aug 21 at 18:15

For starters, the your TSLA example is a calendar spread and the strategy in your image is a diagonal spread so let's ignore your TSLA example.

The statement in the link is correct. You start with a diagonal spread where you:

  • Sell an OTM put at strike "B" which is one month out
  • Buy a more OTM put at strike "A" which is two months out

Because you want the underlying to remain in the vicinity of "B", you're neutral.

Here's the part that you missed. When the near month put at strike "B" expires, you sell another one month put at strike at "B". The new position then becomes a bullish vertical spread:

  • Short a one month put at "B"
  • Long a one month put at "A"

Now you are neutral/bullish because you only lose if the underlying drops below "B".

In your screen shot, you lopped off the rest of the explanation at the bottom of your screenshot. You only included the first 2 lines. The missing excerpt states that the adjustment creates a SHORT PUT SPREAD:


You can think of this as a two-step strategy. It’s a cross between a long calendar spread with puts

and a SHORT PUT SPREAD. It starts out as a time decay play. Then once you sell a second put with strike B (after front-month expiration), you have legged into a short put spread. Ideally, you will be able to establish this strategy for a net credit or for a small net debit.

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  • $\begingroup$ Thanks. I edited my post to clarify that $A < B$. Sorry for lopping "off the rest of the explanation at the bottom of your screenshot." I screenshot more of the Web page now. Do these edits affect your answer? $\endgroup$ – AYX.CLDR Aug 21 at 18:23
  • $\begingroup$ Your edits do not affect my answer because I ignored your errors and addressed the strategies involved :->) $\endgroup$ – Bob Baerker Aug 21 at 18:28
  • $\begingroup$ Thanks! 5. Out of curiosity, what's the option strategy called if $B < A$, where B's the short-term put option, and A the LEAPS put? $\endgroup$ – AYX.CLDR Aug 21 at 18:29
  • $\begingroup$ 6. To streamline this post, can you please edit your answer to remove the quotes for my screenshot now shows them? And is quant.stackexchange.com/questions/57522/… obsolete now? $\endgroup$ – AYX.CLDR Aug 21 at 18:30
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    $\begingroup$ What's the option strategy called if B<A, where B's the short-term put option, and A the LEAPS put? That is a diagonal put spread. Sorry but I'm not going to edit my answer in response to your edits. AFAIC, it's inappropriate for you to expect a responder to edit their answer any time you decide to alter your question. Unless management feels otherwise, for continuity, acknowledge corrections in the comments. $\endgroup$ – Bob Baerker Aug 21 at 18:42

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