Diagonal Put Spread

A diagonal put spread is a sophisticated two-leg strategy that combines bearish directional bias with time decay benefits by using different expiration dates and strike prices, creating a position ideal for traders expecting moderate downward price movement over time. This advanced strategy involves buying a longer-term put at a higher strike and selling a near-term put at a lower strike, allowing traders to benefit from both directional movement and favorable time decay characteristics. The strategy is particularly effective when longer-term implied volatility is relatively cheap compared to near-term volatility, creating opportunities for enhanced risk-adjusted returns. Professional traders favor diagonal put spreads when they have moderate bearish conviction but want to optimize the cost basis through time decay benefits from the short put position. The strategy requires active management as the position dynamics change significantly as the near-term expiration approaches, potentially requiring rolling or closing adjustments. The diagonal structure provides better capital efficiency compared to simple put purchases while maintaining bearish exposure

If NIFTY is at ₹25,800, set up: Buy monthly ₹25,800 Put for ₹140, Sell weekly ₹25,600 Put for ₹55, creating ₹85 net debit with bearish profit potential and time decay benefits from the short weekly put.