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Diagonal Bull Call Debit Spread:
The stock has to close above the higher strike
price on expiration day for maximum gain. (Both options exercised)
Leg One: buy to open back
month long call at lower strike price.
Leg Two: sell to open front
month short call at higher strike price.
Net Debit = $ buy to open - $ sell to open.
Max. Gain = Difference between strike prices –
Net Debit.
Max. Loss = Net Debit.
Break Even = lower strike price + net debit
Please notice this is just a variation of the
Bull Call Debit Spread strategy. By buying the long call in the back
month and selling the short call in the front month, we want our long
position loses value at a slower pace and our short position loses money
at a faster pace. In general, we buy our long call position 2 to 3 months
further from the current month and sell our short call position in the
current month. We use this strategy just in case the stock doesn’t
achieve our objective in the first month. If that happens, we continue to
sell short call in the subsequent month and keep our long call in place.
On the other hand, if we achieve our objective in the first month, we
simply close our positions all together and collect our profit.
Personally, when I use this strategy, I make sure the difference between
strike prices is always more than the net debit.
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