Call Diagonal Spread
Buy a longer-term call at a lower strike and sell a shorter-term call at a higher strike. A bullish strategy combining time and directional elements.
We're recording short 2-3 minute video explainers for every lesson. The full written guide is ready below. Bookmark this page — the video will appear right here when it's ready.
What is a Call Diagonal Spread?
A call diagonal spread combines elements of a calendar spread and a vertical spread. You buy a longer-dated call at a lower strike and sell a shorter-dated call at a higher strike. The trade has a bullish directional bias because the long call is at a lower strike, and it also benefits from time decay because the short call expires sooner.
This is essentially a poor man's covered call or a directional calendar. You want the stock to rise gradually toward the short call strike by the time the front-month option expires.
How to Set It Up
- Buy 1 call at a lower strike with a later expiration (back month)
- Sell 1 call at a higher strike with a nearer expiration (front month)
- Different strikes, different expirations
- Strike selection: The long call should be ITM or ATM for the most stock-like behavior. The short call should be OTM, where you expect resistance or a price target.
- Expiration gap: Front month 20-30 days, back month 60-120 days or longer.
The net debit is the cost of the long call minus the credit from the short call.
When to Use This Strategy
Use a call diagonal when:
- You are moderately bullish over the medium term
- You want to combine time decay income with bullish exposure
- You want a cheaper entry than buying a LEAPS and can sell calls against it
- The stock is trending slowly upward
- You want to repeatedly sell short-term calls against a longer-term position
This is the foundation of the poor man's covered call strategy. You keep selling short-term calls against your long-dated call month after month.
Example Trade
Stock XYZ is trading at $100. You are bullish and expect a gradual move to $105-$110.
- Buy 1 XYZ $95 call expiring in 90 days for $8.00
- Sell 1 XYZ $105 call expiring in 30 days for $1.50
- Net debit: $8.00 - $1.50 = $6.50 ($650 total)
If XYZ goes to $105 at front-month expiration: The short call expires ATM (worthless). The long call has gained value and is now worth roughly $12 with 60 days left. Value: $1,200 - $650 = $550 profit. You can sell another call for the next month.
If XYZ stays at $100: The short call expires worthless (you keep $150). The long call is worth roughly $7.50. Sell another call to reduce cost further.
If XYZ drops to $90: The short call expires worthless. The long call has lost value, now worth roughly $3-$4. Loss of $250-$350 so far, but you can sell another call to recover some cost.
Risk and Reward
- Max profit: Achieved when the stock reaches the short call strike at front-month expiration. The exact profit depends on the remaining value of the long call.
- Max loss: Net debit paid. $650 in our example. Occurs if the stock drops significantly and both options lose all value.
- Breakeven: Approximately the long call strike plus the net debit, adjusted for remaining time value.
The real power is in the repeated selling of short-term calls. Each month you sell a new call and reduce your cost basis.
Tips and Common Mistakes
- Do not let the short call go ITM unchecked. If the stock is approaching the short strike, roll the call up and out.
- Buy the long call deep ITM for more stock-like behavior and less time value decay.
- The long call should have at least 60 days more time than the short call to maintain the time decay advantage.
- Watch for the stock dropping below the long call strike. That changes the entire risk profile.
Related Strategies
- Poor Man's Covered Call — the most popular version of the call diagonal
- Call Calendar Spread — same strikes, different expirations
- Bull Call Spread — same expiration, different strikes
Want to learn how to trade this strategy step by step?
Browse Courses All Strategies Profit Calculator