Call Diagonal Spread Strategy

The Call Diagonal Spread is a hybrid options strategy that combines features of both vertical and calendar spreads. It involves selling a short-term call option at a lower strike price and buying a longer-term call option at a higher strike price. This setup allows traders to benefit from time decay, volatility shifts, and directional movement — typically with a bullish or neutral outlook.

Structure

• Sell 1 short-term call (lower strike)
• Buy 1 long-term call (higher strike)
• Different expiration dates for each leg

Profit & Loss Profile

• Max Profit: Occurs if the stock stays below the short call strike at front-month expiration
• Max Loss: Limited to spread width minus net credit (or plus net debit)
• Breakeven: Depends on timing, volatility, and long call value after short call expires

Ideal Market Conditions

• Neutral to slightly bullish short-term outlook
• Expecting increased volatility or upside movement after short call expires
• Best when implied volatility is low at entry and expected to rise

Example

A stock is trading at $100. You:

• Sell 1 call expiring in 1 week at $100 for $2
• Buy 1 call expiring in 1 month at $105 for $4

Net debit = $2. If the stock stays below $100, the short call expires worthless and the long call retains value. If the stock rises later, the long call gains further.

Risks & Considerations

• Early assignment risk on short call if in-the-money
• Time decay works against the long call after short call expires
• Requires active management and volatility awareness