Short Diagonal Put Spread
The inverse of the Long Diagonal Put — buy a near-dated OTM put, sell a longer-dated ITM put. Bullish lean with negative vega.
Max GainNet Credit Received
Max LossNot capped by the structure — after the short expiration a long-dated sold put remains uncovered, with loss running to the strike less the credit
Break-evenNo closed formula — it depends on the long put’s value when the short one expires
TypeModerate net credit
Ideal IV environmentHigh IV with expectation of compression
Profit / Loss Diagram
Short Diagonal Put at the short expiration
What is this strategy?
The Short Diagonal Put Spread is the inverse of the Long Diagonal Put. An advanced structure with a bullish lean.
It receives a net credit. It profits if the underlying rises or IV falls. It loses if price drops hard or IV explodes.
For advanced traders with a moderately bullish outlook.
Construction
| Action | Instrument | Strike | Expiration | Example |
|---|---|---|---|---|
| BUY | 1 Put | OTM (lower) | Front (30 DTE) | +1 SPY May 440 Put |
| SELL | 1 Put | ITM (higher) | Back (90 DTE) | -1 SPY Jul 460 Put |
Example
SPY at $450, moderately bullish outlook.
- Long May 440 Put −$200 premium paid
- Short Jul 460 Put +$1,500 premium received
- Net Credit +$1,300
- Maximum Gain $1,300 (the credit) if SPY rises and both puts expire worthless
- Loss if SPY falls to $420 The sold July put becomes expensive faster than the purchased May put gains
- Risk after the short expiration A sold July put remains with no cover: loss running to the strike less the credit
The Greeks
δDelta — Bullish Bias
Net positive delta.
θTheta — Negative
Time works against you.
νVega — Negative
Benefits from falling implied volatility.
γGamma — Positive
Long gamma from the near-dated purchased leg.
Position Management
- 01 Stop Loss Set a stop at 50% of the credit to cap losses.
Frequently Asked Questions
When should this structure be opened?
When you are bullish and implied volatility is high with an expectation of compression. It is the inverse of the bearish diagonal.
What is its main risk?
A sharp decline in the underlying, the opposite of what the structure pursues.
How is it managed before expiration?
By closing if price breaks decisively through support, without letting the loss widen.
Which strategy is it most often confused with?
The bull put spread, from which it is distinguished by using different expirations on each leg.