Ratio Diagonal

A ratio diagonal is an advanced two-leg strategy that combines the time decay benefits of calendar spreads with the income enhancement of ratio spreads, creating a position ideal for traders with moderate bullish bias and strong time decay expectations. This sophisticated strategy involves buying a longer-term at-the-money call and selling two near-term out-of-the-money calls, allowing traders to benefit from accelerated time decay of the short-term options while maintaining long-term upside participation through the longer-dated call. The strategy is particularly effective when near-term implied volatility is elevated relative to longer-term volatility, creating favorable time decay dynamics. Professional traders use ratio diagonals to generate income while maintaining bullish exposure, but the strategy requires active management due to unlimited risk above the short strikes if not properly hedged. The position benefits from sideways to moderately bullish movement in the near term followed by potential larger moves in the longer term

If NIFTY is at ₹25,800, set up: Buy monthly ₹25,800 Call for ₹180, Sell two weekly ₹26,200 Calls for ₹35 each, creating ₹110 net debit with income potential from time decay and moderate upside participation.