What is a diagonal spread?

The Diagonal spread can be a very effective way to pull monthly income out of the stock market and keep have long term gain as well.

The Diagonal spread strategy is very similar to the covered call strategy. The only difference between the two is that covered calls involves buying the stock, this strategy involves buying the leap.

Let us look at an example. We were looking at RTP. It was trading at $275. The stock looked like a good buy. So we decided to buy the $250 leap 2 years away. This cost you $100.

Although we are long term bullish on it we also didn’t think this stock would reach $300 in the near future. So you sell a short term $300 call for $5. This makes us an instant $5.

If the stock goes to $300 of further we would have to sell the stock at $300. Because we own the leap we would be able to buy the stock at $250 if we need to.

Now we can sell an out of the money call every time we get the chance, providing income. Our leap is also going up because the stock is going up.

After a year the stock is at $481 and our leap is at $250. This gives us a 150% on the leap. Also we sold $30 worth of calls throughout the year where we were not called out of. This gives us an extra 30%, for a total of 180% profit.

A diagonal option spread can be a great way to produce income and growth. But it does not come without risk. This is why like everything else you still have to develop a system and manage risk when dealing with this spread.

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