A systematic approach of trading volatility disparities. A Quick Introduction 1. If the purchased call has a higher strike price, it's further out of the money and the spread has a bearish bias. If the purchased put has a lower strike price, it's further out of the money and the spread has a bullish bias.
Trader then waits.
The Diagonal Time Spread can earn a profit over a wide range of prices provided the underlying futures contract doesn't move contrary to the delta bias and provided implied volatility doesn't collapse. The potential profit comes from positive time decay. Potential losses are limited because the long option partially hedges the short option. Potential profits are also limited and come at expiration date of the short option if the underlying futures are near the strike price of the short option. The Diagonal Time Spread can be adjusted to accommodate a swiftly trending market.