Ken Trester

Profits on the Diagonal

by Ken Trester   08/19/08

This position isn't without risk, because if the stock takes a wrong turn and declines, your long in-the-money calls may move out-of-the-money and you run the risk of being assigned those calls at the $60 strike. (This means that someone who established a long position in your short October calls could force you to buy stock at the exercise price). There is a risk that, no matter whether a short option position is in-the-money or out-of-the-money, the option-holder has the right to assign the option-seller to honor the obligation that shorting an option entails.

If you would happen to be assigned, you could buy stock at the $50 strike of your long call to cover the obligation of the short $60 call. So, it may be a wise choice to keep the spread value as low as possible because you've got time on your side to tailor your position accordingly!

While it's true that the fastest way from point A to point B is a straight line, a diagonal spread can be a relatively steady way to profits!

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If you enjoyed this article, check out Ken Trester's "Selling Options Can Generate Instant Profits" and "Short-Term Gains Using Long-Term Options."