Explanation

A trader implements this strategy when he holds a neutral to somewhat bearish stance on the near-month expiry of the underlying but bearish on the long term, he will apply Diagonal Bear Put Spread. The strategy involves buying higher strike price (OTM) long-term puts in next month / far month expiry and simultaneously shorting an equal number of near-month (ITM) puts of the same underlying stock with a lower strike. The strategy bags limited rewards with limited risk.

Risk

Limited

Reward

Limited

Construction

Sell 1 near-Month OTM Put Option

Buy 1 next-Month ITM Put Option