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Visually Analyze Option Strategies
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Diagonal Call Spread

 

This strategy involves buying long term calls and simultaneously writing an equal number of near-month calls of the same underlying stock with a higher strike.

 

This is a good trade to do with LEAPS in combination with short-term options.

 

Market Opinion

 

Bullish long term, neutral to bullish near term.

 

P/L

 

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When To Use

 

When you want to generate income on your underlying stock.

 

Example

 

XXXX is trading at $26 on March 20, 2011 (volatility 40%).

Buy January 2013 25 calls at $6.60.

Sell April 2011 27.50 calls at $0.55.

 

 

Benefit

 

The benefit is the ability to accrue monthly income from the underlying stock, making a greater yield than using a covered call.

 

Risk vs. Reward

 

The risk is the net debit paid. The reward is the long call value at the expiration of the short call when stock price is at the higher strike price minus net debit.

 

Net Upside

 

The stock price is at the higher sold call strike price at expiration.

 

Net Downside

 

The net debit of the calls purchased less the sold calls.

 

Break Even Point

 

The lower strike price plus net debit paid.

 

Effect Of Volatility

 

N/A

 

Effect Of Time Decay

 

Positive to income by eroding the value of the short call faster. Negative by eroding the value of the long call.

 

Alternatives Before Expiration

 

If the position falls to 60% of the purchase price, close the position.

 

Alternatives After Expiration

 

If stock price higher than strike price of the sold call, you can either 1)exercise your call to cover your sold option being called and take the profit, or, 2)roll over to the next month by buying back the call and selling the next month’s call at the same or higher strike price.

 

 

 

 

 

 

                 

          

 
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