Lecture no 15 diagonal call
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The document outlines the concepts and strategies related to diagonal call options, a variation of covered calls, focusing on generating income through selling higher strike short-term calls against long-term deep in-the-money calls. It covers the bullish outlook, risk and reward profiles, effects of time decay, trading steps, and the process for exiting and managing positions. Additionally, it includes advantages and disadvantages of the strategy along with a real-time example of a covered short strangle market behavior.
Lecture no 15 diagonal call
- 1. Lecture No 15 Diagonal Call Rohan Sharma (Coach)
- 2. Basics Concepts – Diagonal Call Proficiency - Intermediate Direction – Bullish Asset Leg – Long Call + Short Call Max Risk - Limited Max Reward - Limited Income Strategies
- 3. Description – Diagonal Call The Diagonal Call is a variation of a Covered Call where you substitute the long stock with a long-term deep In the Money long call option instead. This has the effect of reducing the investment, thereby increasing the initial yield The Diagonal Call solves the problems experienced with the Calendar Call, in that the shape of the risk profile (see the following) is more akin to the Covered Call, which is what we want. Buy a deep ITM (lower strike) long-term expiration call. Sell a higher strike short-term call (say monthly).
- 4. Context - Diagonal Call Outlook With a Diagonal Call, your outlook is bullish. Rationale To generate income against your longer term long position by selling calls and receiving the premium. Net Position This is a net debit transaction because your bought calls will be more expensive than your sold calls, which are OTM and have less time value. Your maximum risk on the trade itself is limited to the net debit of the bought calls less the sold calls. Your maximum reward occurs when the stock price is at the sold call (higher) strike price at the expiration of the sold call.
- 5. Context - Diagonal Call Effect of Time Decay Time decay affects your Diagonal Call trade in a mixed fashion. It erodes the value of the long call but helps you with your income strategy by eroding the value faster on the short call. Time Period to Trade You will be safest to choose a long time to expiration with the long call and a short time for the short call. Breakeven Down = Depends on the value of the long call option at the time of the short call expiration Breakeven Up = Depends on the value of the long call option at the time of the short call expiration
- 6. Steps to Trading a Diagonal Call Steps In Try to ensure that the trend is upward or range bound and identify a clear area of support. Steps Out Manage your position according to the rules defined in your Trading Plan If the stock closes above the higher strike at expiration, you will be exercised. You will sell your long call, buy the stock at the market price, and deliver it at the higher strike price, having profited from both the option premium you received and the uplift in the long option premium. If the stock remains below the higher strike but above your stop loss, let the short call expire worthless and keep the entire premium. If you like, you can then write another call for the following month. If the stock falls below your stop loss, then either sell the long option (if you’re approved for Naked Call writing) or reverse the entire position.
- 7. Exiting the Trade - Diagonal Call Exiting the Position With this strategy, you can simply unravel the spread by buying back the calls you sold and selling the calls you bought in the first place. Advanced traders may leg up and down as the underlying asset fluctuates up and down. In this way, you can take incremental profits before the expiration of the trade.
- 8. Exiting the Trade - Diagonal Call Mitigating a Loss Unravel the trade as described previously. Advanced traders may choose to only partially unravel the spread leg-by-leg. In this way, they will leave one leg of the spread exposed in order to attempt to profit from it.
- 9. Advantages and Disadvantages Advantages Generate monthly income. Can profit from range bound stocks and make a higher yield than with a Covered Call. Disadvantages Capped upside if the stock rises. Can lose on the upside if the stock rises significantly. High yield does not necessarily mean a profitable or high probability profitable trade.
- 10. Real Time Example Diagonal Call Rohan Sharma (Coach)
- 11. Price Movement Position on Charts Rohan Sharma (Coach)
- 13. Example – Covered Short Strangle Market Behavior Nifty Option /Future Option & Future Both Action (Long/ Short) Both Price Movement Expectation Side Ways Future (Long) 10900 Strike Price (Short Option) = Call 11000 Premium 60 Strike Price (Short Option) = Put 10800 Premium 65 Time to Expiry Mid/Last of the Month Position of Price in Charts Sideways Max Risk Unlimited Max Reward Limited
- 14. Covered Short Strangle Strike Price (Call Short) 11000 Premium 60 BEP 11060 Strike Price (Short Put) 10800 Premium 65 BEP 10735 Future Long 10900 Nifty at Expiry Long Future 10900 Short Call (BEP) 11060 Short Put (BEP) 10735 Total P&L 11400 500 -340 65 225 11300 400 -240 65 225 11200 300 -140 65 225 11100 200 -40 65 225 11000 100 60 65 225 10900 0 60 65 125 10800 -100 60 65 25 10700 -200 60 -35 -175 10500 -400 60 -235 -575