Bull Diagonal Spread

A diagonal spread is constructed by purchasing a call/put far out in time, and selling a near term put/call on a further OTM strike to reduce cost basis.

Bull Call Diagonal Spread

A Bull Call Diagonal Spread is done with a purchase of a longer dated out-of-the-money Call option and sale of a shorter dated out-of-the-money Call option, both which have different strike prices.

Payoff Diagram:

Direction Assumption: Neutral-Bullish

Maximum Profit at Near-Dated Expiration: Credit received from selling Call + Profit of Long Call Maximum profit at the near-dated expiration is realized when the underlying is at the Short Call strike price. Maximum Profit at Far-Dated Expiration: Unlimited

Maximum Loss at Near-Dated Expiration:: Unlimited Maximum Loss at Far-Dated Expiration: Limited to the debit paid for the Long Call. Maximum loss at the far-dated expiration is realized if the underlying moves below the Long Call strike price.

Breakeven Price at Far-Dated Expiration: Equal to the Long Call Strike Price + Premium paid

Theta: Passage of Time -> Positive Effect The net effect of time decay is positive. It will erode the value of the Short Call in a bigger extent than the Long Call.

Volatility: Positive Effect