# Long Put Diagonal Spread Options Strategy Explained

Contents

## Long Put Diagonal Summary

- A long put diagonal spread consists of two legs that span two expiration dates and resemble a calendar spread but with different strike prices like a vertical spread.
- Setting up a long put diagonal involves buying a closer-to-the-money put option in a further-dated expiration and selling a further out-of-the-money put in a near-dated expiration, resulting in a net debit.
- Long diagonal put spreads can have efficient exposure to implied volatility but also experience time decay like any long options strategy.
- Peak profitability for a long diagonal spread may occur when the underlying falls to the near-dated short put's strike price.
- The maximum loss being the debit paid and realized if the entire spread expires out-of-the-money (OTM).
- Diagonals can be set up as a Poor Man's Covered Put (PMCP) by sliding the long option in-the-money (ITM) to potentially provide a more capital-efficient method of gaining synthetic short share exposure and generate interim income with the sale of the short put.

## Long Put Diagonal Spread

A long put diagonal spread consists of two put options in two separate expirations. Buying an at-the-money (ATM) put option in a long-term expiration and selling an out-of-the-money (OTM) put option in a near-term expiration is a basic example of a long put diagonal spread. A diagonal spread resembles a vertical and a calendar spread mashup. Diagonals resemble a calendar spread because the strategy spans multiple expiration dates. However, unlike a calendar, a diagonal will have different strike prices like a vertical spread.

Not only can the value of a long diagonal put spread rise when the price of the underlying drops sharply and approaches the strike prices of the spread, but the increase can reflect heightened uncertainty due to any recent price action, also known as implied volatility. In short, a long diagonal put spread can benefit from increased volatility since long options strategies also provide positive exposure to changes in implied volatility via Vega.

However, long put diagonals experience time decay, like any other long options strategy. The value of the long diagonal may depreciate over time when the underlying stock price rises or remains constant and does not approach the strike prices of the diagonal. As a result, the underlying price must drop faster toward the strike price of the long put to make up for any lost value due to time decay.

Diagonals can also be set up as a Poor Man's Covered Put (PMCP), depending on your strike selection. A PMCP consists of buying an in-the-money (ITM) put in a further-dated expiration and locating an out-of-the-money (OTM) short put in a near-dated expiration to offset the extrinsic value on the long put. When executed correctly, a PMCP may be a more capital-efficient strategy for gaining short share exposure while generating income by selling near-dated puts against the long put option without shorting the stock outright and selling puts against it.

### Expiration Risk for Long Put Diagonal Spreads

Since a long put diagonal spread has a short put component that expires before the long put option, there are early assignment risks just like any other short option strategy. With that said, the long put option offsets the intrinsic value risk below the short put strike. Still, buying power and the position itself can change if assigned early in a long put diagonal spread, even though the risk stays the same when the long put is still active.

Options that expire ITM by $0.01 or more are auto-exercised, resulting in an assignment of 100 long shares of stock for each ITM short put. Any options strategy involving short options, including a naked short put, may face after-hours risk on the day of expiration. In summary, although the short put may have expired OTM based on the stock's closing print, an OTM short put option can become ITM based on any extreme downward price movement after the market close, resulting in an unexpected assignment of long shares. The only way to eliminate after-hours risk is by closing any short options positions before expiration.

It is crucial to have a plan, like closing or rolling the position before expiration, if assignment is not part of your strategy. Please visit the tastytrade Help Center to learn more about expiration risk, including more about pin risk and after-hours risk.

## Profit & Loss Diagram of a Long Put Diagonal Spread

Long put diagonals can be profitable if the underlying drops and approaches the long put options strike price. Since the long put option has a later expiration, it may appreciate faster than the near-dated short put due to its extended time value (and delta exposure). Like a long put calendar spread, calculating the max profit of a long put diagonal spread is impossible due to the inability to exactly pinpoint extrinsic value remaining in the long option when the short option expires. However, peak profitability could occur when the underlying falls to the near-dated short put's strike price at the expiration of the short option. The max loss for the spread is the debit paid and is realized when both legs expire OTM and are worthless. The profit and loss graph below assumes a scenario where both legs are still active.

## What’s Required for a Long Put Diagonal Spread?

A long put diagonal spread consists of two legs:

- A short put in a near-dated expiration
- A long put in a further-dated expiration above the short put strike

## Example of a Long Put Diagonal Spread

XYZ currently trading @ $50 in January

- Sell to open -1 XYZ March 40-strike put @ $1 credit
- Buy to open +1 XYZ June 45-stike put @ $3 debit

Cost: $2 debit ($200 total)

## Example of a Poor Man's Covered Put

XYZ currently trading @ $45 in January

- Sell to open -1 XYZ March 40-stike put @ $1 credit
- Buy to open +1 XYZ June 50-strike put @ $7.50 debit (ITM put with $5 of intrinsic & $2.50 of extrinsic value)

Cost: $6.50 (The $7.50 cost basis on the long option is reduced by the $1 credit in the short option)

| Works against the spread’s value |

| Estimated as max intrinsic value + remaining extrinsic value in long option at short option’s expiration |

| Total debit paid |

(at expiration) | Estimate of long put strike - debit paid |

| Margin and IRA |

| Poor Man's Covered Put (setup dependent) |

## How to place a long put diagonal spread order on the tastytrade desktop platform

- Enter a symbol.
- Navigate to the Trade tab.
- Go to the Table mode.
- Click on an expiration date to expand.
- Click the Bid price of the short put leg in the near-dated expiration. Drag the bar up or down to adjust the strike.
- Click the Ask price of your long put leg in the further-dated expiration. Drag the bar up or down to adjust the strike.
- Go to the order ticket to determine the quantity, price, time-in-force (TIF), etc. before clicking "Review & Send." Review everything including commissions and fees before sending the order.

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