Call Diagonal Spread

A near call sold against a further-dated call bought at a lower strike: the long contract stands in for the shares, and the short one is written against it.

Also called Diagonal call spread, Poor man's covered call

Outlook

Bullish

Family

Diagonal

Level

Advanced

Legs

2 legs

Expirations

2 expirations

Opens for

Debit

Maximum profit

Limited

Maximum loss

Limited

Legs at the reference strikes this page's diagrams are drawn from

Leg	Side	Contract	Ratio	How the strike is chosen
A	Short	Call 105	1	Delta 30
B	Long	Call 95	1	Delta 70

What it is

A deep call bought at B in a far expiration, and a call sold at A above it in a near one. Different strikes and different expirations — a calendar and a vertical at the same time, which is where the name comes from.

Its common name says what it is for: a poor man’s covered call. The far-dated deep call stands in for 100 shares, and the near-dated call is written against it exactly as it would be against stock. The difference is capital: a 70-delta LEAP costs a fraction of the shares it substitutes for.

The payoff

At expiration

A rising line that flattens above the short strike: the position gains with the underlying up to A and is capped beyond it, valued when the near contract expires.

⛔ Read at the near expiry, with the far call still alive. Below A the sold call expires worthless and the position is the long call, which is worth more the higher the underlying is. Above A the gain flattens, because what the long call gains the short one gives back.

The maximum loss is the debit — the net cost of the two contracts — and it is reached if the underlying falls far enough that the long call loses most of its value.

How it behaves before expiration

Today, before expiration

Today's value is a shallower version of the same rising, flattening curve.

The curve steepens as the front expiry approaches, because that is when the sold call’s time value drains fastest.

The Greeks

Delta is positive: the long call’s delta less the short call’s. A 70-delta long against a 30-delta short leaves roughly 40.

Gamma is negative near A and positive lower down.

Theta is positive while the underlying is below A, which is the point of the structure.

Vega is positive — the far-dated long call carries more than the near-dated short one.

Where it lives in the volatility environment

Practitioners compare it directly to a covered call and describe the trade-off as capital against exposure: the same written-call income for far less committed, in exchange for a substitute that expires and has to be rolled. Term structure matters here as it does for a calendar, because the two legs sit in different expirations.

What can go wrong

• The substitute expires. Shares do not; a long call does, and maintaining the position means rolling it at whatever it then costs.
• A sharp fall hurts more than it would hurt shares in percentage terms, because the long call loses extrinsic value as well as intrinsic.
• Early assignment on the short call leaves short shares against a long call.
• A rise past A caps the gain, and the structure has to be managed as a spread rather than held.
• Two expirations, two markets.

Building it in Option Panel

Open Build Strategy and pick Call Diagonal Spread. The long leg’s strike and expiration are chosen first — typically by a high delta and a far date — and the short leg is then selected independently, by delta or by strike, in a nearer expiration.

Back to the encyclopaedia · What-if analysis in the docs

Related strategies

• Covered Call — the same idea with real shares instead of a long call.
• Call Calendar Spread — the same two expirations at one strike, with no directional view.
• Put Diagonal Spread — the mirror on the put side.