A long call diagonal option strategy involves buying a longer-term call option at a lower strike price and selling a shorter-term call option at a higher strike price. This setup requires paying a net debit upfront. It combines elements of a spread and a calendar strategy, allowing traders to profit from a gradual upward trend in the stock over time while collecting income from the short-term option.
Maximum profit occurs if the stock price moves up to the higher strike price right when the short-term option reaches expiration. At that point, the short option expires worthless while the long option gains value. Maximum loss is strictly capped at the initial net debit paid if the stock falls dramatically and both options expire without any value.
- Buy 90-day $95 Call for $7.75
- Sell 30-day $105 Call for $1.00
- Stock near $105 at 30 days: ~$410 Peak Profit
- Stock well above $105: Profit Continues (~$325)
- Stock far below $95: Loss, up to the -$675 debit