CH.APTER 14 
Diagonalizing a Spread 
When one uses both different striking prices and different expiration dates in a 
spread, it is a diagonal spread. Generally, the long side of the spread would expire 
later than the short side of the spread. Note that this is within the definition of a 
spread for margin purposes: The long side must have a maturity equal to or longer 
than the maturity of the short side. With the exception of calendar spreads, all the 
previous chapters on spreads have described ones in which the expiration dates of the 
short call and the long call were the same. However, any of these spreads can be diag­
onalized; one can replace the long call in any spread with one expiring at a later date. 
In general, diagonalizing a spread in this manner makes it slightly rrwre bear­
ish at near-term expiration. This can be seen by observing what would happen if the 
stock fell or rose substantially. If the stock falls, the long side of the spread will retain 
some value because of its longer maturity. Thus, a diagonal spread will generally do 
better to the downside than will a regular spread. If the stock rises substantially, all 
calls will come to parity. Thus, there is no advantage in the long-term call; it will be 
selling for approximately the same price as the purchased call in a normal spread. 
However, since the strategist had to pay more originally for the longer-term call, his 
upside profits would not be as great. 
A diagonalized position has an advantage in that one can reestablish the posi­
tion if the written calls expire worthless in the spread. Thus, the increased cost of 
buying a longer-term call initially may prove to be a savings if one can write against 
it twice. These tactics are described for various spread strategies. 
THE DIAGONAL BULL SPREAD 
A vertical call bull spread consists of buying a call at a lower striking price and sell­
ing a call at a higher striking price, both with the same expiration date. The diagonal 
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