Bull Call Diagonal Spread
The Bull Call Diagonal Spread is a low risk options trading strategy that can be used when your analysis indicates that the price of a stock, ETF, index, or commodity futures contract has strong probability of going steadily higher over the next several months.
This option strategy is a debit spread which is a combination of a Bull Call Spread and a Call Calendar Spread. This is a good trade to do with LEAPS in combination with short-term options. This trade can be done in two ways depending on how aggressive you want to be.
In the conservative strategy, buy an ITM (lower strike price) Call with 60 days or greater to expiration, and sell an OTM (higher strike price) Call with at least 30 days until expiration and at most 30 days less until expiration than the purchased Call.
In the aggressive strategy buy an ATM (lower strike price) Call with 60 days or greater to expiration, and sell an OTM (higher strike price) Call with at least 30 days until expiration and at most 30 days less until expiration than the purchased Call.
Entry Rules
You have bullish expectations for the underlying asset but you don’t expect the asset price to rise too quickly. Pay no more than $4 for a $5 spread, and $8 for a $10 spread, including commissions. The Implied Volatility of the sold Call should be at least 10% greater than the IV of the purchased Call.
Exit Rule Insights
- Cut your losses short. Sell the position anytime the price of the spread falls to 60% of your 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 if you are assigned, and take your profit; or
- Close your position for a 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 underlying asset.
If the asset 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 underlying asset.
Profit & Loss Calculations for Call Diagonal Spread
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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