Long Diagonal Call Spread
Sell a near-dated OTM call, buy a longer-dated ITM call. Combines positive theta with a moderate bullish lean.
Profit / Loss Diagram
Long Diagonal Call at the short expiration
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 a popular variant of the PMCC (Poor Man’s Covered Call) where the short leg is out of the money rather than at the money. 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
| Action | Instrument | Strike | Expiration | Example |
|---|---|---|---|---|
| SELL | 1 Call | OTM (higher) | Front (30 DTE) | -1 SPY May 460 Call |
| BUY | 1 Call | ITM (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
Net positive delta: the long ITM call outweighs the short OTM call.
The near-dated short gains theta faster than the longer-dated long loses it.
The longer-dated long carries more vega exposure than the near-dated short.
Gamma risk concentrates near the short strike.
Position Management
- 01 Close at the Short Expiration Close before the front month expires to avoid extreme gamma.
- 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.