Call Diagonal Spread at a glance
| Construction | Sell 1 call 2 strikes above the money in the front month and buy 1 call at the money in the next month. |
|---|---|
| Outlook | Bullish |
| Volatility view | Wants rising IV |
| Max profit | Estimated value of the back month call at front month expiration with the stock at the short strike, minus the net debit, times 100. |
| Max loss | Net debit paid, times 100. |
| Breakeven | The lower breakeven is the price at front month expiration where the back month call's estimated value equals the net debit, since the short call is worthless below its strike. |
| Experience level | Advanced |
| Also called | Long call diagonal, Diagonal call spread |
How a call diagonal spread works
A call diagonal spread mixes two ideas. The different strikes give it a directional lean like a bull call spread, and the different expirations let it collect time decay like a calendar. You pay a net debit because the at the money next month call costs more than the out of the money front month call. The long call has a lower strike and a later expiration than the short call, so it covers the short call for the whole life of the front month.
The payoff is viewed at front month expiration, when the short call is worth its intrinsic value and the long call still has about a month left. Profit peaks near the short strike, where the short call expires worthless and the long call is in the money with time value remaining. On a large rally both calls go deep in the money, so the spread trends toward the strike width plus a little time value. Max profit and breakevens depend on the back month call's value, so the calculator estimates them with an American pricing model.
Before front expiration, the position has positive delta, so a gradual rise helps, and theta grows more positive as the stock approaches the short strike. Implied volatility helps because the longer dated long call has more vega. A sharp drop hurts most, since the long call loses value while the short call has little left to give back. A fast rally far past the short strike also caps the gain, because the short call starts to track the stock.
Call Diagonal Spread example with real numbers
With the stock at $100, implied volatility at 30%, a 4.1% risk free rate and no dividend, you would sell 1 105 call (32 days) at $1.78, buy 1 100 call (60 days) at $5.19. That is a net debit of $341. At the front month expiration, the model estimates a maximum profit of $328 and a maximum loss of $341, with a breakeven at $99.89. The lognormal chance of profit is 50%.
These are theoretical American option prices from the Bjerksund and Stensland model, not live quotes. Load any ticker in the call diagonal spread calculator above to run the same math on real market prices.
When to use a call diagonal spread
- You are moderately bullish and expect the stock to rise toward a target by front month expiration.
- You want a cheaper alternative to buying a call outright, with the short call reducing the cost.
- You plan to sell a new front month call each cycle against the same long call.
- Implied volatility is moderate or low, and you would benefit if it rises.
Max profit, max loss and breakeven
Maximum profit
Estimated value of the back month call at front month expiration with the stock at the short strike, minus the net debit, times 100. It depends on the long call's remaining time value and implied volatility at that date, so the calculator estimates it with an American pricing model.
Maximum loss
Net debit paid, times 100. The worst case is a large drop, where both calls lose nearly all their value; because the long call has the lower strike, a rally cannot lose more than the debit.
Breakeven
The lower breakeven is the price at front month expiration where the back month call's estimated value equals the net debit, since the short call is worthless below its strike. An upper breakeven exists only if the net debit exceeds the strike width plus the long call's leftover time value; otherwise a big rally still ends in a small profit. Both are model estimates.
Call Diagonal Spread Greeks
- Delta: Delta is positive at entry because the long at the money call has more delta than the short out of the money call. It falls as the stock rises past the short strike, where the short call's delta catches up.
- Gamma: Gamma can be slightly positive or negative at entry depending on how far away the short strike is, and it turns negative as front expiration approaches with the stock near the short strike.
- Theta: Theta is often small at entry and grows positive as the stock approaches the short strike, where the front month call decays fastest.
- Vega: Vega is positive because the longer dated long call has more vega. Rising implied volatility helps the position and falling volatility hurts it.
See the live numbers for your position in the Greeks tab of the calculator, or explore a single option in the options Greeks calculator.
Early exercise and assignment risk
The short front month call starts out of the money, so early assignment is unlikely at entry. The risk appears if the stock rallies through the short strike before an ex dividend date. American call holders often exercise the day before the ex date when the dividend is larger than the call's remaining time value, and an in the money front month call can easily meet that test. If you are assigned, you are short 100 shares at the short strike and owe the dividend if you are still short on the ex date.
Your long next month call has a lower strike, so it more than covers the short stock: exercising it would buy shares below the price at which you sold them. In practice, exercising throws away the long call's time value, so traders usually buy the shares in the market and keep the long call, or close everything. The cleaner fix is preventive: before an ex dividend date, roll the short call up and out or close the spread if the short call is in the money with little time value left.
The calculator's Early exercise risk tab flags short legs that are likely to be assigned. For a single option, use the early exercise calculator or read how early exercise and assignment work.
Pros and cons
Pros
- Lower cost than a long call, with defined risk equal to the net debit.
- Combines a bullish lean with time decay from the short front month call.
- Can be repeated by selling new front month calls against the same long call.
- Benefits from rising implied volatility.
Cons
- Max profit and breakevens are estimates that depend on the long call's value at front month expiration.
- Upside is capped near the short strike during each front month cycle.
- A sharp drop can cost most of the debit.
- An in the money short call can be assigned early before an ex dividend date.
How to manage a call diagonal spread
- Close or roll the short call when it has lost most of its value, then sell a new front month call to keep collecting time decay.
- If the stock rallies through the short strike, roll the short call up and out to a later month.
- If the stock falls, avoid selling a new short call below the long call's strike, since a rebound could then lock in a loss on the spread.
- Check for ex dividend dates inside the front month and act before the short call is in the money with little time value.
Call Diagonal Spread FAQ
What is a call diagonal spread?
A call diagonal spread buys a longer dated call and sells a shorter dated call at a higher strike for a net debit. It is a bullish time spread that profits most when the stock rises to the short strike by front month expiration. The long call covers the short call, so risk is limited to the debit.
How is a diagonal spread different from a calendar spread?
A diagonal spread uses different strikes and different expirations, while a calendar spread uses the same strike with different expirations. The strike gap gives the diagonal a directional bias, so a call diagonal is bullish, whereas an at the money calendar is neutral. Both collect time decay from the short front month option.
What is the max loss on a call diagonal?
The max loss on a call diagonal is the net debit paid, times 100. It is reached mainly if the stock falls far enough that both calls lose almost all their value. Because the long call has a lower strike than the short call, a rally cannot lose more than the debit.
Is a poor man's covered call a call diagonal?
Yes, a poor man's covered call is a call diagonal that uses a deep in the money LEAPS call as the long leg. The standard call diagonal on this site buys an at the money next month call instead, which costs less but is more sensitive to time decay and volatility. Both sell a shorter dated out of the money call against the long call.
Related strategies
Poor Man's Covered Call
A poor man's covered call is a call diagonal that buys a deep in the money LEAPS call and sells a short dated out of the money call against it, imitating a covered call for a fraction of the capital.
Call Calendar Spread
A calendar spread sells a near term option and buys a longer dated option at the same strike, and it profits most when the stock sits near that strike as the short option expires.
Bull Call Spread
A bull call spread is a two leg debit spread that buys a call and sells a higher strike call in the same expiration.
Put Diagonal Spread
A put diagonal spread buys a longer dated put and sells a shorter dated put at a lower strike, and it profits most if the stock falls toward the short strike by front month expiration.
Educational tool, not financial advice. Calculations are theoretical and depend on your inputs; real fills, fees, early assignment and dividends can change results. Options involve risk and are not suitable for every investor.