The chart illustrates how extreme the recent move has been and how violent the pullback can become when positioning gets crowded.

What is a diagonal spread?

A diagonal spread is a two-leg options position that combines:

• A longer-dated option you own (the “slow engine”)
• A shorter-dated option you sell against it (the “fast engine”)

In a call diagonal, both legs are calls.

• The long-dated call is often used to maintain longer-term upside exposure.
• The short-dated call helps offset some of the cost by collecting premium, but it can also cap near-term upside if the underlying rallies sharply.

Unlike a vertical spread (same expiry), a diagonal mixes time and strike.

• Vertical spread: mainly directional, same expiry
• Diagonal spread: directional plus time/volatility structure, different expiries

A helpful mental model: a diagonal is what happens when a calendar spread and a vertical spread have a child, then give that child a risk management obsession.

Why diagonals become interesting when implied volatility is extreme

In the option chain shown, implied volatility is not merely “high”. It is screaming.

For Feb 2026 (expires 20 Feb 2026, 17 days):

• 85 call: about 2.10 bid / 2.21 ask, ~95.48% mid IV, 47,164 open interest
• 85 put: about 14.35 bid / 14.65 ask, ~96.36% mid IV, 19,530 open interest

Two observations matter for learning:

1. the market is pricing unusually large moves (high implied volatility)
2. open interest is concentrated at certain strikes, suggesting those levels have become popular reference points for positioning

High implied volatility does not predict direction. What it does predict is that the market is charging a premium for uncertainty.

This is precisely why a diagonal is worth studying: it is a structure that can maintain exposure while selling some of that premium back to the market.

The mechanics: two engines with different sensitivities

A diagonal spread behaves like a negotiation between two options.

The short-dated call (sold)

• tends to lose value faster as time passes (time decay)
• is sensitive to near-term price jumps, especially if the underlying approaches its strike
• is often the leg most impacted by front-month implied volatility shifts

The long-dated call (owned)

• tends to retain value longer because it has more time remaining
• tends to be more sensitive to longer-term changes in implied volatility
• provides continued exposure if the theme persists beyond the short leg’s expiry

This is the trade-off: the short leg can finance the long leg, but it also introduces path risk if the underlying moves too far too fast.

An illustrative diagonal spread example (using SLV for context only)

The example shown below illustrates a call diagonal built on SLV around 72.44.

• long Jun 18 70 call
• short Feb 20 85 call
• net debit ~1,092.50

The simulation’s payoff view summarises the structure:

• max loss: about 1,092.50 (the debit paid)
• max profit: about 1,022.92 (as displayed)
• chance of profit: about 57% (as displayed)
• breakeven: about 70.10 (as displayed)

It is important to treat these as model outputs tied to assumptions (volatility, time, and pricing inputs). The exact realised outcome depends on how SLV moves and how implied volatility evolves.

Why these strikes could make sense as a teaching example

This structure is interesting because it separates longer-run participation from near-term premium dynamics. The long call at 70 sits close to the underlying, giving it meaningful exposure to SLV’s direction over a longer horizon. The short call at 85 is out-of-the-money, allowing premium collection, but it also means the position becomes more sensitive to a fast upside move than it would be with a higher short strike. In practice, the short strike is where the trade-off lives: closer strikes collect more premium, but they bring forward the point where the short leg starts dominating the risk profile.

What a diagonal is trying to achieve (conceptually)

A call diagonal typically benefits from one or more of the following paths:

• SLV holds steady or rises moderately into the short expiry, allowing the short call to decay
• front-month implied volatility falls, reducing the value of the short call faster
• after the short call expires, the long-dated call still has time value and can continue to participate if the uptrend resumes

In plain terms: the structure often prefers a market that remains volatile enough to pay premium, but not so explosive that it runs straight through the short strike.

Where diagonals can go wrong

A diagonal is not a “safe” trade. It is a shaped exposure with specific failure modes.

• fast upside spike: SLV rallies aggressively toward or through the short call strike. The short leg can dominate the risk profile.
• volatility re-ignition: front-month implied volatility rises further, inflating the short call’s price and making the position harder to manage.
• broad volatility collapse: if implied volatility drops across the curve, the long call can lose value as well, not just the short call.
• liquidity and slippage: in stressed markets, bid-ask spreads can widen, turning theoretical edges into execution costs.
• assignment considerations: a short call that becomes in-the-money can be assigned early. That is not inherently catastrophic, but it changes the position mechanics and may create unwanted exposure.

Diagonal versus vertical: why the difference matters

A vertical spread is primarily a directional structure with a fixed expiry. It can be clean and simple, but in high implied volatility it can still be expensive, and it forces a single time horizon.
A diagonal gives a second lever: the trader is not only choosing a directional thesis, but also a time profile.

• If the move is expected to take longer, the longer-dated leg matters.
• If near-term premium is unusually rich, the short leg matters.

That is why diagonals are often described as “position management friendly” structures: they can be adjusted over time by changing only the short leg.

A verification-first checklist before using a diagonal

This article focuses on mechanics, not signals. Still, a diagonal becomes easier to understand (and evaluate) when a few things are checked first:

• term structure: is front-month implied volatility higher than longer-dated implied volatility for similar deltas?
• expected move: what move is the market pricing into the short expiry?
• liquidity: are the bid-ask spreads tight enough to make the structure meaningful?
• event risk: are there known catalysts before the short expiry that could keep implied volatility elevated?
• assignment readiness: is there comfort with what happens if the short call becomes in-the-money?

What would change the interpretation

The educational logic of this diagonal is strongest when near-term implied volatility is richer than longer-dated implied volatility.

If a term-structure snapshot showed that longer-dated implied volatility is similarly elevated (or higher), the position becomes less about “selling rich front-month premium” and more about “financing longer-dated exposure while accepting path risk”.

That is still a valid learning case, but it changes the headline reason why the diagonal is attractive in the first place.

Closing thought: what this example is meant to teach

When markets behave politely, most strategies look intelligent.
When markets behave like silver has recently, strategies have to show their wiring.

A diagonal spread is one of the clearer wiring diagrams in listed options: it forces a trader to separate exposure from timing, and to admit that volatility is not an afterthought. It is part of the price.