How To Write A Diagonal Call

You are out of the money but still earn a “good” return around 12% due to the leverage of only outlaying about half the normal amount of cash of a conventional covered call. You also have leveraged access to the upside (and downside!) of price movements in the underlying stock. It is also important to note the delta at the money is over 50% (better than half chance a normal covered call would see shares called away) while the delta at 112 is a little over 12%. There is a lot more certainty in this trade.

If the price gets too close for comfort prior to the expiry date or even moves into the money, roll the short call “up and out”. That is buy to close your short position and sell to open a new call at a later expiry with a higher strike price. It may be necessary to put more cash into the trade. In the unlikely event, you are assigned early, it is usually best to sell the long call and buy back the short shares to close the position. Your gain in the long calls will offset your loss on the short position in shares. Really, your counterparty did you a favor by surrendering the remaining time value on your short call.

I’ll be watching this position and some other diagonal call opportunities over the next couple weeks. I will document those trades here when and if they happen.

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