Long Put Diagonal
Buy a deep ITM LEAP put, sell a near-term OTM put. Bearish income with leveraged downside exposure.
The long put diagonal is the bearish mirror of the Poor Man’s Covered Call. Instead of owning a deep ITM LEAP call, you own a deep ITM LEAP put — a leveraged short-stock substitute. You sell near-term OTM puts against it, collecting income on each cycle. The result is a bearish income position that costs a fraction of shorting 100 shares outright.
The structure
Think of shorting 100 shares and selling cash-secured puts against the position (an unusual but conceptually valid approach). Now replace the short stock with a deep ITM LEAP put. That LEAP has a delta near −0.80, so it gains value almost dollar for dollar as the stock falls. You then sell a shorter-dated OTM put against it, collecting premium.
- Long leg:buy one deep ITM put, 120-270 DTE (the LEAP). Target delta −0.70 to −0.85 — deep enough to behave like short stock.
- Short leg:sell one OTM put, 20-45 DTE. Target delta −0.20 to −0.30 — far enough below the current price to give the stock room to chop.
The key requirement: the short put strike must be below the long put strike. If the stock drops past the short put strike, you can exercise the LEAP to sell at the LEAP strike, buy at the short put strike, and pocket the difference minus the net debit.
Worked example
XOM is at $110. You’re bearish on energy over the next six months but don’t want to short 100 shares ($11,000 margin requirement plus unlimited risk).
- Buy the 180 DTE $130 put (delta ~−0.80) for $22.00
- Sell the 30 DTE $105 put (delta ~−0.25) for $2.50
- Net debit: $19.50 ($1,950 per diagonal)
- Max loss: $1,950 (if XOM rallies above $130 at LEAP expiration)
- Max profit per assignment: $130 − $105 − $19.50 = $5.50 per share ($550)
- Capital deployed: $1,950 vs. $11,000+ for short stock
If XOM stays above $105 in 30 days, the short put expires worthless and you keep the $250. Net cost in the LEAP drops to $17. Sell another 30-DTE put and repeat. If XOM drops past $105 and the short put is assigned, you buy 100 shares at $105 and exercise the LEAP to sell at $130 — net $2,500 minus the $1,950 debit = $550 profit.
When to use it
- Bearish view, income focus. You think the stock declines over the coming months and want to collect income along the way, not just wait for the move.
- Can’t or won’t short stock. Short selling requires margin, exposes you to unlimited upside risk, and carries borrow fees. The LEAP put replaces all of that with a defined-risk, fixed-cost position.
- Moderate IV environment.Front-month puts should be rich enough to sell meaningfully, and back-month puts priced reasonably. If IV is extremely low, the income per cycle won’t justify the setup.
- Gradual decline expected, not a crash. The strategy profits most when the stock drifts lower slowly, letting you collect income on each cycle. A sudden crash triggers the short put before you can roll, limiting your max gain to the strike spread.
How Tradient ranks them
The put diagonal scanner mirrors the PMCC scanner but on the put side. It finds LEAP puts with delta below −0.70 and extrinsic value below 15% of the option price, then pairs each with the highest-credit OTM short put in the front-month DTE window. Per-cycle yield (short put premium divided by net debit) and total cost basis are the primary sort keys.
Tradient Score favors put diagonals where the LEAP has at least 80% intrinsic value, the short put delta is between −0.20 and −0.30, and the per-cycle yield exceeds 3%. Setups where the short strike is too close to the LEAP strike are penalized for the same reason as in the call diagonal — compressed profit zone.
Managing the trade
Roll the short put monthly
Same cadence as the PMCC. Let the short put expire or buy it back at 50-75% of max premium, then sell the next cycle. Each sale reduces your net cost in the LEAP.
Short put is breached
If the stock drops through the short put strike, you can roll down and out for a credit, or let assignment happen. If assigned, exercise the LEAP to sell shares at the higher strike and take the spread profit. Only roll if the new position has a positive expected value.
Close if the LEAP loses intrinsic
If the stock rallies and the LEAP delta moves above −0.60, the position is no longer an effective short-stock substitute. The income from short puts won’t compensate for the LEAP’s loss in value. Close and reassess your thesis.
Common mistakes
- LEAP with too little intrinsic value.Same trap as the call diagonal. If the LEAP put is only slightly ITM, extrinsic decay erodes your long position. Buy deep enough that the put is at least 80% intrinsic (delta −0.75 or deeper).
- Short put too close to the LEAP strike. If you buy the $130 LEAP put and sell the $125 short put, your max profit is $5 minus a large debit — terrible R:R. Keep at least $15-$25 of room between strikes.
- Ignoring early assignment on the short put. The short put is American-style. If it goes deep ITM, you may be assigned shares you didn’t plan to buy. Have cash or margin available, or plan to exercise the LEAP immediately.
- Forgetting the LEAP expires.A 180 DTE LEAP needs to be rolled when it reaches 60-90 DTE, just like the call diagonal version. Don’t let time value evaporate from your long leg.
- Holding through a reversal.If your bearish thesis is invalidated, close the position. The LEAP erodes fast when it transitions from deep ITM to near ATM. Don’t hope for a re-reversal.
Where to go next
- Long call diagonal (PMCC) — the bullish mirror of this strategy.
- Long put calendar — same strike across expirations, neutral lean.
- Bear put spread — single-expiration bearish alternative with simpler management.