← AdvancedLesson 21 · 4:37
Diagonal spread
Summary
You can build a diagonal spread, the poor man's covered call, from a deep in-the-money long-dated call and a sold near-dated call. You can compare its money and its loss with a covered call, and check that the debit is less than the gap between strikes.
Key terms
- diagonal spread
- A spread with two strikes and two expiries, such as a long-dated deep call with a near-dated call sold against it.
- poor man's covered call
- A diagonal that uses a deep in-the-money call in place of 100 shares under a sold call.
- vertical spread
- Two options of the same kind and expiry, one bought and one sold, at different strikes.
- stock replacement
- Using a deep in-the-money call to stand in for 100 shares.
- roll
- Selling a new near-dated option against the same bought option once the old one has ended or been closed.
Check yourself
Answer each question to see why the right answer is right.
1. On the option chain grid, where does a diagonal sit?
2. You buy the $80 call with 90 days left for $2,048 and sell the $105 call with 30 days left for $158. How does the money compare with a covered call on 100 shares?
3. At $80 on day 30, the diagonal loses $1,499 and the covered call loses $1,842. Which is the bigger risk to the money put in?
4. After 30 days with XYZ at $100, the sold call has melted away. What does rolling mean here?
5. You paid $18.90 a share, and the strikes are $25 apart. Why does the lesson check this?
Finished the video and the quiz? .