Diagonal Call Spread
This trade is a combination of a Bull Call Spread and a Call Calendar Spread.
Buy ATM (lower strike price) Call with 60 days or greater to expiration.
Sell OTM (higher strike price) Call with at least 30 days until expiration
and at least 30 days less until expiration than purchased Call.
This is a good trade to do with LEAPS in combination with short-term options.
Entry Rules
Bullish expectations for the underlying asset, but you don?t expect stock price
to move too quickly.
Pay no more than $4 for a $5 spread, and $8 for a $10 spread, including commissions.
Implied Volatility Skews of sold Call at least 10% greater than purchased Call.
Exit Rules
- Close position if it falls to 60% of purchase price.
- Hold position until expiration week of the sold option.
If the stock price is greater than the strike price of the sold Call option,
you have two choices:
- Exercise your purchased Call option to cover your sold option being called,
and take your profit; or
- Roll forward to the next month - buy back the Call option you sold and sell
the next month?s Call option at the same or higher strike price depending on
the Call option prices and your outlook for the stock.
If the stock price is less than the strike price of the sold Call option,
it will expire worthless.
Sell the next month?s OTM (higher strike price) option on the Monday following
expiration.
If the option you purchased is entering its final month before expiration, close
the position, or keep the Call or convert to a Bull Call Spread depending on your
outlook for the stock.
Profit & Loss Calculations
Maximum Risk : Limited to the net debit paid for the spread
Maximum Profit : Limited to difference in strike prices - net debit paid
Breakeven : Lower Call strike price + net debit paid
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