What is Diagonal Call Option Strategy?

• Diagonal Call is a modified calendar spread involving different strike price of different expiry. It is a combination of calendar spread (same strike; different expiration) and vertical Spread (same expiration; different Strike). Diagonal call can be created by selling current expiry OTM Call and Buying next expiry ITM Call.

When to Execute?

• Diagonal call needs to be executed when we have a neutral to bullish view of the underlying in near term. Overall expectation from this strategy is underlying to close at or below the short call at current expiry as short call will expire worthless and long call will lose some of its intrinsic value.

What is the Trade?

• Diagonal call can be created by selling current expiry OTM Call and Buying next expiry ITM Call.

What will be maximum profit?

• Maximum reward under Diagonal Call is value of long call option on expiration of short call when the stock trades near the sell call strike less initial outflow to build the strategy.

What will be maximum loss?

• Maximum risk on the trade is limited to net debit to build the strategy.

What are the advantages?

• Generate monthly income. Can profit from range bound stocks and make a higher yield than with a Covered Call or Naked Put.

What are the disadvantages?

• Capped upside if the stock rises. Can lose on upside if the stock rises significantly. High yield does not necessarily mean a profitable or high probability profitable trade. Strike selection between buy call and sell call is very important.

Example of Diagonal Call:

• Suppose Nifty is Trade 15800. Nifty future price is 15800. Diagonal call can be executed by selling CE current expiry 16000 (OTM) CE @ 40 and Buying Next Week expiry 15700 CE@ 250 (ITM) Max Profit will be earned if market stays around at or above 15840.00