Calendar Spread vs Diagonal Spread Explained | Which Strategy Should You Use?

All right. So, in this video, I want to talk about the difference between [music] a calendar spread and a diagonal spread and talk about which one is better. Now, spoiler alert, one's not better than the other. They are both used for specific purposes. All right, so let's jump in. So, looking at Flux, the analyzer, this is a this is a calendar spread in this case. This has 14 days to expiration in the front, 17 in the back. This is right near the money. Uh so you can see it's a pretty deltaneutral strategy. If I turn on the Greeks, you can see the delta is 0.56. So very deltaneutral, meaning um you know it's very similar to both the up and the downside as far as uh how the P&L would react. So that's that's a delta neutral that's an example of a deltaneutral calendar spread. When would I do a diagonal spread instead of a calendar? Well, you you can think of a calendar spread is basically like a calendar, excuse me, you can you can think of a diagonal spread is if a calendar and a vertical spread had a baby. Okay? So, essentially when you put on a diagonal spread, let's look at that. It still uses two expirations just like the calendar. So, in this case, still looking at the 14 and the 17 DTE. The only difference is on the calendar spread, both strikes share the same strike. However, with a diagonal spread, the one of the one of the strikes is different. So, in this case, we were looking at the 7715 calendar spread. On this one, the short option, the one in the 14-day cycle, I changed to 7740. So, that's 25 points higher. And you can see what the difference is on the graph. Right now, it's much more directional. If I put the Greeks back on, you can see uh now I have a delta of 778. Positive delta, meaning you're going to benefit uh from this trade if price moves higher. Okay, so this is this is the difference. Now, you can you can overlay these as well. So, um so I've been kind of I click off that one and I click back back on the calendar. You can see what that looks like. You could also use the comparison feature by clicking this little compare here. And now when you look at this, you're going to see both both strategies overlaid on top of each other. Uh let me get it let me get rid of the T0 lines just to clean up the chart a little bit. So this will give you an idea of what it looks like. These are just the expiration lines. So the calendar's in green. The the dash blue is the diagonal spread. So it gives you a clear picture of okay, if price is right here, the real question is what is my assumption? Do I want to put on a trade that benefits if price just chops chops around within range or am I looking for something that's a little bit more directional? I can do diagonal spreads to the upside. I can do diagonal spreads to the downside. So it really just comes down to your assumption of what you're trying to accomplish. Uh you can also change the strikes. Uh you could make these uh you know the further apart they are. Let's say so let's bring this from 7740 up to 7750. You can see that's getting a more and more like a vertical spread rather than a calendar spread or diagonal. The closer you bring the strikes together, it's going to bring it closer and closer to the look of a calendar until if you make the strikes meet, it is going to be a calendar, right? So, that's that's kind of the difference. So, you can you can play around with this. Sometimes I will, if I'm if I'm looking to put on a calendar, but I have a little bit of a bias in one direction or the other, I will just diagonalize it a little bit, meaning move the strikes in the direction that I have my bias in to give me a little bit more uh benefit in that in that favor. So, if it does move in the direction of my bias, that that trade is going to make money faster. And that's the that's the real consideration is what's your bias? if you have one at all and if you do diagonalize that to a point where it fits your assumption. So the other thing you can do is uh I've I've compared them. The other thing that you can do on the risk graph on flux is you could combine them. So instead of comparing you could combine them. And so, you know, let's say you let's say you started off with a calendar and then price moved and you decided you wanted to add a diagonal. So, this is the original calendar. Then, if I add in the diagonal or let's let's move these strikes a little bit more just to make it a little bit more. So, then I add the diagonal. Now, it looks like this combined. So again, comparing is overlaying them. Combining is putting both spreads together. And then if I bring back the T0 lines, you can kind of see what the current profit would be at specific price levels. You can also use use the slider to give yourself a theoretical idea. Right? In this case, we have 14 days to expiration for the front till the front options expire. What if we move that through time and we move that to the point where okay now we only have eight days to expiration right now you can see even if it's sitting right there it could have a potential profit if you look in that little green box of right around $500 and the more it moves in your favor obviously that profit is going to go up and then it flatlines out here kind of above that 7850 level in this example but it gives you a theoretical ical idea of how uh how the profits will look at different times till expiration as well as uh different price levels. Now this is all theoretical especially with calendar spreads um they can because we're dealing with two different expirations you also have to be understanding of the implied volatility between the front and the back expirations. So remember, we are selling the options with less time and we're buying options with more time. So we want the ones that we sold, we want those to decay faster and we want the ones that we bought to expand or decay slower than the front. Okay? And that's how you know uh that the that the implied volatility is also working in your favor. So that goes for any type of calendarized spread. If you're looking at a calendar, a diagonal, a double diagonal, a double calendar, anything that uses more than one expiration cycle, you have to be aware of how the implied volatility between the two works as well. On flux, we actually have a calendar IV spread. So, if I go to that same expiration that I was just looking at, which was the 1417 DTE, what this measures is the blue line is that front implied volatility. The green line is the back implied volatility and the orange line is the ratio between the two. So it's the front divided by the back. So if I look at what this spread has done today, you can see what the ratio has done. Now a ratio moving up would work against your position. That would mean the back options are expanding faster than the front. That's not what you want after you after you enter the position. Uh if we look at the 5-day, you can kind of see what that ratio has done over the last 5 days. We had a little bit of a spike down today. If you look at the 20-day cycle of that expiration cycle, you can see where it has been uh over the last 20 days and help make an informed decision if uh uh what the ratio where the ratio is and provide context for how to use that ratio because once you get in a position, you really want the ratio to be moving down and that means the front options are decaying faster than the back. Okay, so calendar spreads are a little bit more complicated than uh than trades that you do with one expiration. However, uh if you can coordinate the implied volatility correctly and and you put them on in the right spots, they can be a very profitable tool and a very powerful spread to understand how to use. So, hope that was helpful. If you have any questions or comments, leave them in the comments below. I answer every question. Take care. We'll see you in the next video.