What it is
A long option with a later expiry and a short option with a nearer one, at different strikes. Here: buy a call at today's price expiring in two months, and sell a call above the price expiring in one. The name comes from the way the strikes and the dates both differ, a diagonal across an options chain rather than a row or a column.
It combines two ideas already on this site. The different expiries make it a calendar, collecting faster decay on the near option. The different strikes make it a debit spread with a lean, paid more if the stock climbs toward the sold strike.
What has to happen for it to make money
The stock should rise toward the sold strike by the near expiry, but not race far past it. At the sold strike, the near call expires worthless while the long call has gained from the rise and still holds time value. Below the break-even it loses, down to roughly the debit if the stock falls hard.
Above the sold strike the gain levels off and slowly gives a little back, as both calls start to move together. Rising volatility helps, as it does a calendar, because the longer-dated call is more sensitive to it.
Once it is on
At the near expiry the choice is to close both legs, or keep the long call and sell a new near-dated call against it. Repeating that is how some traders run it as an ongoing income trade; the poor man's covered call is the same approach with a much longer-dated long leg.
If the stock is above the sold strike as it expires, the short call may be assigned, leaving you short shares; the long call covers that, but closing or rolling beforehand keeps the position simple.
What goes wrong
A fall. The long call loses value with the stock and the short call's small premium does not cover much of it. A large drop costs close to the whole debit.
Volatility collapsing lowers the long call's value whatever the stock does, and the chart's curve, drawn at the volatility of the day it opened, sits too high.
Pros and cons
- Pro: a directional lean with the decay of a calendar.
- Pro: the loss is around the debit paid.
- Pro: the long call can be written against again.
- Con: loses if the stock falls.
- Con: the gain flattens above the sold strike.
- Con: depends on where volatility is when the near leg expires.
In Restrike
Held together, the two calls show on the Portfolio as a single diagonal, its two dates side by side. Because the bought call here is struck below the sold one and outlives it, the sold call is treated as covered and costs nothing in the margin figures. On the Log they stay two rows; a single strategy label across both lets the scorecards treat them as one trade. Restrike reads them read-only from your broker and never places a trade.