Definition of "Diagonal Spread"

An investment strategy that entails buying or selling of two different option positions of the same class (two call positions or two put positions in the same stock). Both the strike prices and the expiration dates of the options are different. For instance, a three month ABC call sold with a strike price of 30 and a two month call sold with a strike price of 25. Investors gain or lose as the difference in price narrows or widens.