Put Diagonal Spreads, Calendar Spreads, and Rolling Short Puts

# In a Diagonal Spread with Puts, aren't you bearish in the back month?


# In a Diagonal Spread with Puts, aren't you bearish in the back month?












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

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

- 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).

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

- 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"?

## Answer by Quantoisseur (score 2)

https://quant.stackexchange.com/a/57524

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.

## Answer by Bob Baerker (score 0)

https://quant.stackexchange.com/a/57530

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:

> THE STRATEGY

> 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.