Name: Diagonal Spread w/ Calls
Setup: Sell (short) out-of-the-money Strike A call (front month) and Buy (long) Strike B call at a later month (back month) and When the short call expires sell another call at Strike A
Bias: Neutral to Bearish
Break-Even: Due to the fact that it is played over two different expiration months determining an exact breakeven point is difficult
Max Profit: Limited: Credit received from both short calls minus the debit paid for the Strike B call
Max Loss: Limited: Strike A – Strike B + Net Debit Paid
Margin: Margin equals the difference between strike prices
Time Decay: At the beginning time decay will be on your side as your short call will lose value quicker. This is the equivalent to a calendar spread w/ calls. However, after the first short call expires and you sell another call time decay will be neutral as it will eat away at both the long and short options.
Implied Volatility: Implied volatility’s effect is mixed in this case. On one hand you want volatility to increase because it will drive up the price premiums so you will receive a greater amount on the 2nd short call. However, you do not want the stock to move a lot as this is a neutral play.
Notes: None at this time
Featured in Trade Review: None at this time
