Home MarketXLS
Dashboard MarketXLS
Screener MarketXLS
Stock Ranks MarketXLS
Spreadsheet Builder MarketXLS
Logout MarketXLS
Option StrategiesOptionsOptions strategies

Long Call Diagonal Spread – An Advance Option Strategy

Written by Pooja Tanwani (Individual Contributor)
Wed Feb 03 2021
Long Call diagonal spread
See how MarketXLS helps you take advantage in the markets.
Download Option Templates →
Long Call diagonal spread
 

What is a Diagonal Spread?
A Diagonal Spread is the options strategy that combines horizontal spread (calendar spread) and vertical spread. It involves simultaneously buying and selling of the same class of options with different strikes and expiration dates. The term “diagonal” comes from the options chain layout where the two options contract with different strikes price and expiration dates would be diagonally oriented.

How to built up Diagonal Spread?
We can build a diagonal spread by using two call options or two put options. One should be of near month expiration, and another one should of far month expiration. Also, one option’s strike price must be higher, and the strike price of another one must be lower. It depends upon your view of how you want to build the diagonal spread.

Diagonal Spread

Long Call Diagonal Spread
Long call diagonal spread is implemented by buying a call option of a lower strike price expiring in the far month and selling a call option of a higher strike price expiring in the near month. It is also called Poor’s man covered call because we can buy a call option instead of owning 100 stocks and can sell a call against it with a low capital requirement. This strategy gives a benefit of vertical and calendar spread in terms of long delta and time decay.

View – Bullish

Setup
XYZ stock is currently trading at $50.
Long 1 ITM Mar 45 call option at $15
Short 1 OTM Feb 55 call option at $5
Net Debit= $10.

Long Call diagonal spread

Maximum Profit
The maximum profit is realized if the stock price is equal to the short call’s strike price on the short call’s expiration date. We cannot figure out the exact maximum profit since it depends on the long call price and its implied volatility. However, the potential payoff is calculated with the following formula:
Width of the call strikes – Net Premium paid

Maximum Risk

  1. If established for the net credit-
    Maximum Risk = Difference between strike prices – Net Credit Received.
  2. If established for the net debit-
    Maximum Risk = Difference between strike prices + Net Premium paid.

Long Diagonal Call Spread vs. Long Calendar Call Spread vs. Long Vertical  Call Spread

Diagonal Spread Vs Calendar Spread Vs Vertical Spread

Currently, Microsoft(MSFT) is at $239.50 (05 Feb, 21). We have built long call diagonal spread, Long Calendar spread, and long vertical spread using different strike prices and expiration dates.

  1. Long Delta
    In-the-Money (ITM) options have a higher delta than the Out-of-the-Money options (OTM). Delta of the long options is positive, while that of the short options is negative. By longing for ITM call options, we are buying a positive delta, which will increase the net delta of the strategy. A Higher Positive delta will increase the higher premium if the stock moves in an upward direction.
  2. Time Decay (Theta)
    Time decay accelerates when the options approach the expiration date.
    Therefore, Theta has more impact on the front month short option than the back month-long option. Theta of the near-term option is higher than the far month option. Since we have short, the near-term option decay happens faster, and at the expiration, the option loses its value and becomes worthless. While the long option decays at a slower rate as compared to the near-term short option.
  3. High Vega
    Volatility tends to show a greater boost in the value of the back month option we are long, compared to the negative impacts of the front-month option we are short. Since Vega is higher for the far-term options and lower for the near-term options, we are buying higher Vega and selling lower Vega. An increase in the implied volatility in the back month option creates a favorable impact on this strategy, everything else being equal.

Short Call Diagonal Spread
In the case of a bearish view, one can build a short call diagonal spread.
In the short call diagonal spread, we sell the longer-term option having the lower strike price and buy the near-term option with a higher strike price—generally, this strategy builds on net credit. This strategy involves limited risk and limited profit potential.

Setup
Buy Feb 55 call option at $10
Sell Mar 45 Call option at $15
Net credit received = $5

Maximum Profit
The maximum profit is equal to the net credit received (commissions excluded). If the stock price falls below the short call, then the short call expires worthless, and the entire premium will be treated as profit.

Maximum Risk
The maximum risk is realized if the stock price is equal to the long call’s strike price on the long call’s expiration date. The loss equals the price of the short call minus the net credit received.

Conclusion
The Diagonal call spread is an advanced strategy, so one must continuously observe the stock’s position. We have to take care of various other factors like time decay, volatility, delta, gamma, price of the underlying asset, etc. One must appropriately select the strike prices and expiration dates. It is advisable to roll over the position if the direction or the option greeks goes against you.

Disclaimer

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein.

Reference

To know more about option greeks, click here.

To know more about the diagonal spread, click here.

Interested in building, analyzing and managing Portfolios in Excel?
Download our Free Portfolio Template
Download Option Templates
Stock screens
Public saved screens

Top 100 Gainers Today

Top 100 losers Today

Call: 1-877-778-8358
Ankur Mohan MarketXLS
I am so happy you are here. My name is Ankur and I am the founder/CEO of MarketXLS. Over the past four years, I have helped more than 2500 customers to implement their own investment research strategies and monitoring systems in Excel.
Get Access to 1 Billion Usable Market data points IN YOUR EXCEL SHEETS WITH EASY TO USE EXCEL FUNCTIONSGet started today
Search for a stock

Get Access to 1 Billion Usable Market data points IN YOUR EXCEL SHEETS WITH EASY TO USE EXCEL FUNCTIONS

Get started today

Top MarketXLS Rank stocks

Dick's Sporting Goods Inc logo

Dick's Sporting Goods Inc

116.74
 
USD
 
6.17
 
(5.58%)
83
Rank
Optionable: Yes
Market Cap: 8,757 M
Industry: Specialty Retail
52 week range    
63.45   
   142.78
Academy Sports and Outdoors Inc logo

Academy Sports and Outdoors Inc

47.63
 
USD
 
2.31
 
(5.10%)
81
Rank
Optionable: Yes
Market Cap: 3,614 M
Industry: Beer, Wine, and Liquor Stores
52 week range    
25.10   
   51.51
Texas Roadhouse Inc. logo

Texas Roadhouse Inc.

89.63
 
USD
 
3.72
 
(4.33%)
79
Rank
Optionable: Yes
Market Cap: 5,743 M
Industry: Restaurants
52 week range    
68.58   
   96.41
Destination XL Group Inc. logo

Destination XL Group Inc.

5.60
 
USD
 
0.10
 
(1.82%)
79
Rank
Optionable: No
Market Cap: 340 M
Industry: Apparel Stores
52 week range    
3.27   
   9.00
Annaly Capital Management Inc logo

Annaly Capital Management Inc

19.42
 
USD
 
0.02
 
(0.10%)
77
Rank
Optionable: Yes
Market Cap: 8,363 M
Industry: REIT - Diversified
52 week range    
5.45   
   22.78
BJ's Wholesale Club Holdings Inc. logo

BJ's Wholesale Club Holdings Inc.

76.06
 
USD
 
0.04
 
(0.05%)
77
Rank
Optionable: Yes
Market Cap: 10,268 M
Industry: Specialty Retail
52 week range    
51.45   
   79.69
Waste Connections Inc. logo

Waste Connections Inc.

139.06
 
USD
 
1.38
 
(1.00%)
76
Rank
Optionable: Yes
Market Cap: 35,409 M
Industry: Waste Management
52 week range    
113.50   
   148.20
STORE Capital Corporation logo

STORE Capital Corporation

31.90
 
USD
 
0.27
 
(0.85%)
75
Rank
Optionable: Yes
Market Cap: 8,941 M
Industry: REIT - Diversified
52 week range    
24.48   
   36.13
Sprouts Farmers Market Inc. logo

Sprouts Farmers Market Inc.

28.58
 
USD
 
1.51
 
(5.58%)
75
Rank
Optionable: Yes
Market Cap: 2,909 M
Industry: Grocery Stores
52 week range    
21.18   
   35.34
Penske Automotive Group Inc. logo

Penske Automotive Group Inc.

107.01
 
USD
 
6.17
 
(6.12%)
75
Rank
Optionable: Yes
Market Cap: 7,483 M
Industry: Auto & Truck Dealerships
52 week range    
88.58   
   126.93

More Features