Diagonal Call Spread
involves buying long term calls and simultaneously writing an equal number of
near-month calls of the same underlying stock with a higher strike.
is a good trade to do with LEAPS in combination with short-term options.
long term, neutral to bullish near term.
you want to generate income on your underlying stock.
is trading at $26 on March 20, 2011 (volatility 40%).
January 2013 25 calls at $6.60.
April 2011 27.50 calls at $0.55.
benefit is the ability to accrue monthly income from the underlying stock,
making a greater yield than using a covered call.
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
stock price is at the higher sold call strike price at expiration.
net debit of the calls purchased less the sold calls.
lower strike price plus net debit paid.
Of Time Decay
to income by eroding the value of the short call faster. Negative by eroding
the value of the long call.
the position falls to 60% of the purchase price, close the position.
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.