A Diagonal Time Spread using Call Options: A trader sells an at the money or out of the money call that expires in no less than 21 days and purchases a call with a different strike price in a deferred month. If the purchased call has a lower strike, it's closer to the money (or in the money) and the spread has a bullish bias. If the purchased call has a higher strike price, it's further out of the money and the spread has a bearish bias.
A Diagonal Time Spread using Put Options: A trader sells an at the money or out of the money put that expires in no less than 21 days and purchases a put with a different strike price in a deferred month. If the purchased put has a higher strike, it's closer to the money (or in 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. The trader can "roll" the short option or the long option (or both) in the direction the underlying futures contract moves.