Advanced Option Structures · Options Trading Guide
A diagonal call spread uses different strikes and expirations. Replacing shares with a long dated call creates risks that a covered call label can obscure.
Describe the legs precisely
A common configuration buys a longer dated call at a lower strike and sells a nearer dated call at a higher strike. It is often nicknamed the poor man’s covered call. The long call supplies option exposure rather than owned shares. Strike spacing, remaining life and premium determine the result, so the nickname is not a substitute for modelling the actual structure.
Follow one closing scenario
A stock is $100. Buy a later 80 call for $25 and sell a nearer 110 call for $2, creating a $2,300 net debit per standard diagonal. At the nearer expiry, assume the stock is $115 and the long call can be sold for $37 while the short call costs $5 to close. Closing value is $3,200, giving $900 gross profit. The remaining $2 of extrinsic value in the long call is an explicit assumption.
Do not borrow a vertical formula
The later option still has time value at the short expiry. There is no single fixed maximum profit from the strike width alone over the entire evolving strategy. A sharp fall can destroy much of the long premium. Changing volatility across expirations can alter the spread even if price holds steady. Compare several long option values and avoid counting future short call premiums before they exist.
Prepare for assignment
If an American style short call is assigned, the account may become short shares while retaining the long call. The broker does not necessarily exercise the long call automatically. Exercise could forfeit remaining extrinsic value and may create funding consequences. Before entry, document how a short share position would be closed and what capital is available. Selling repeated nearer calls requires fresh decisions about strike, events and whether the longer call remains an effective hedge.
Try it yourself
A diagonal costs $18 per share. It is later closed by selling the long call for $23 and buying the short call for $4. What is gross profit per standard position?
Show the worked answer
Net closing value is $19 per share. Subtract the $18 debit to obtain $100 gross profit before costs.
Further reading
Educational material. Examples and rates are hypothetical, not trade recommendations. Product terms, eligibility and risks vary by venue and jurisdiction.
