Call Diagonal Spread
A call diagonal spread is a multi-leg, risk-defined, bearish strategy with limited profit potential. A call diagonal spread is entered when an investor believes the stock price will be neutral or bearish short-term.
Kirk Du Plessis
Apr 19, 2021
You can think call diagonals as a two-part strategy. Thats because it's basically a cross between a long calendar spread and a short call credit spread. Having features of both basic strategies, this more advanced strategy profits from both a decay in the option prices differential between contract months and the downward directional move in the underlying stock. For the call diagonal spread, you'll first sell a call OTM in the front month and then buy a further OTM call in the back month. This gives your strategy the skew lower because you have an embedded credit spread.
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