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Sigma Terminal
Bullish

Long Diagonal Call Spread

Sell a near-dated OTM call, buy a longer-dated ITM call. Combines positive theta with a moderate bullish lean.

Max GainVariable (maximised at the short strike at expiration)
Max LossNet debit paid ($1,300 in the example)
Break-evenNo closed formula — it depends on the long call’s value when the short one expires
TypeModerate net debit
Ideal IV environmentLow to moderate IV with expectation of expansion in the far expiration

Profit / Loss Diagram

Long Diagonal Call at the short expiration

Long Call (ITM) Short Call (OTM) Peak (at short strike) Loss Small loss

What is this strategy?

The Long Diagonal Call Spread is the bullish version of the generic diagonal. Construction: sell 1 near-dated OTM call, buy 1 longer-dated ITM call. It combines elements of the Long Calendar (positive theta) with a Bull Call Spread (bullish direction).

It suits a moderately bullish outlook where you expect the underlying to drift up toward the short strike. The long ITM back-month call acts as a stock substitute with high delta, while the short OTM front-month call generates theta income.

It is very close to the popular PMCC (Poor Man’s Covered Call), which also sells the short call out of the money; the PMCC is the specific case with a deep in-the-money long call. Risk is defined at the net debit paid, and maximum gain arrives when price finishes exactly at the short strike when the front month expires.

Construction

ActionInstrumentStrikeExpirationExample
SELL1 CallOTM (higher)Front (30 DTE)-1 SPY May 460 Call
BUY1 CallITM (lower)Back (90 DTE)+1 SPY Jul 440 Call

Example

SPY at $450, moderately bullish outlook over 60 days. Long Diagonal Call: sell May 460, buy Jul 440.

  • Short May 460 Call +$200 premium received
  • Long Jul 440 Call −$1,500 premium paid
  • Net Debit $1,300
  • Expected Gain (if SPY = $460 at the May expiration) +$700 to $900 (the July call retains $2,000-2,200 and the May call expires worthless)
  • Maximum Loss $1,300 (the debit) if SPY collapses and both calls expire worthless

The Greeks

δDelta — Bullish Bias

Net positive delta: the long ITM call outweighs the short OTM call.

θTheta — Positive

The near-dated short gains theta faster than the longer-dated long loses it.

νVega — Positive

The longer-dated long carries more vega exposure than the near-dated short.

γGamma — Negative

Gamma risk concentrates near the short strike.

Position Management

  1. 01
    Close at the Short Expiration Close before the front month expires to avoid extreme gamma.
  2. 02
    Roll the Short Leg If the bullish outlook persists, roll the short to the next month at a higher strike to extend the position.

Frequently Asked Questions

When should this structure be opened?
When you are moderately bullish and implied volatility in the far expiration is low. It combines the calendar’s time engine with an upward directional lean.
What is its main risk?
A sharp fall in the underlying, which erodes the long call’s value and can consume the entire debit paid, especially if volatility compresses at the same time. A very strong rally only reduces the gain: because the long call has the lower strike, the position tends to be worth close to the distance between strikes, above the debit paid.
How is it managed before expiration?
By rolling the short leg up and out while the thesis holds, collecting additional credit with each roll.
Which strategy is it most often confused with?
The Poor Man’s Covered Call, which is precisely a specific case of bullish diagonal with a deep in-the-money long leg.
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Related Terms

Diagonal SpreadThe generic version.Poor Man's Covered CallThe specific case with a deep in-the-money long call.Calendar SpreadShort Diagonal Call Spread