Long Diagonal Bull Call Spread

Strategy Motivation

The Long Diagonal Bull Call Spread is a strategy used when you expect the price of an underlying asset to stay within a narrow range in the near term but believe there is a possibility of an upward breakout in the long term.

Construction of the Strategy

The Long Diagonal Bull Call Spread is constructed by buying call options with a longer-term expiration date and selling the same number of call options with a higher strike price and a shorter expiration date.

Brief Description

When using the Long Diagonal Bull Call Spread strategy, buying longer-term at-the-money call options and selling near-term out-of-the-money call options is generally preferable.

Because the bought longer-term option can theoretically cover the risk exposure of the sold near-term option, no additional option margin is required to open the strategy.

This is also a debit strategy since the income from selling the near-term options is less than the cost of buying the longer-term options.

After opening the position, if the market fluctuates in a small range, the near-term options' time value will rapidly decay. At the same time, the value of the longer-term option will hardly be eroded.

When the underlying asset's price rises to the near-month option's strike price at the near-month option's expiration, the strategy can achieve the potential maximum gain.

If the underlying asset rises or falls sharply, investors will suffer losses. The potential maximum loss is the option premium paid.

When the near-term call expires, you can close the longer-term call or open other options to form a new options strategy, depending on the market situation.

Suppose you choose to continue holding the longer-term call. In that case, there is still an opportunity to further benefit from the potential profit brought by the rises in the price of the underlying asset.

Of course, if the underlying asset's price falls later, potential losses will also be incurred.

Gain & Loss

Breakeven: The breakeven point cannot be accurately calculated in advance. Even if an options calculator is used, the result is only a theoretical simulation. As the market changes, the actual breakeven points depend on the actual price of the options, which will fluctuate due to volatility functions, time functions, and other influences.

Max gain: The potential maximum gain is limited during the two options' existence. This cannot be calculated accurately in advance and depends on the longer-term option's price when it expires. When the near-term option expires, the potential maximum loss is unlimited if you do not close the longer-term option.

Max loss: The net option premium paid.