Options Trading Strategies: Bullish - Diagonal Bull Call Spread

Explanation

This strategy is implemented by a trader when he is neutral – moderately bullish in the near-month contract and bullish in the mid-month contract. It involves sale of 1 Near-Month OTM Call Option and buying of 1 Mid-Month ITM Call Option.

Risk: Limited
Reward: Limited

Construction

Sell 1 Near-Month OTM Call Option
Buy 1 Mid-Month ITM Call Option

Example

Suppose NIFTY is trading at 5300 odd points, Mr. X is neutral for the near-month contract and bullish for the mid-month contract. He applies Diagonal Bull Call Spread Strategy where he will sell 1 5400 Near-Month OTM Call Option for a premium of Rs. 25 and buy 1 5200 Mid-Month ITM Call Option at a premium of Rs. 235. His net investment will be Rs. 10500. [(235-25)*50]

Case 1: At the Near-Month expiry if NIFTY closes at 5000, then Mr. X will get to keep the premium amount of 5400 Near-Month OTM Call Option of Rs. 1250. (25*50)

At the Mid-Month expiry if NIFTY closes at 4900, then Mr. X will make a loss on his premium amount paid for 5200 Mid-Month ITM Call Option i.e. Rs. 11750. (235*50)

His net payoff will result in a loss of his entire investment value i.e. Rs. 10500. [(235-25)*50]

Case 2: At the Near-Month expiry if NIFTY closes at 5200, then Mr. X gets to keep the premium amount of 5400 Near-Month OTM Call Option of Rs. 1250. (25*50)

At the Mid-Month expiry if NIFTY closes at 5300, then Mr. X will make a loss on the 5200 Mid-Month ITM Call Option of Rs. 6750. [(100-235)*50]

His net payoff will result in a loss of Rs. 5500. (6750-1250)

Case 3: At the Near-Month expiry if NIFTY closes at 5400, then Mr. X will get to keep the premium amount of 5400 Near-Month OTM Call Option of Rs. 1250. (25*50)

At the Mid-Month expiry if NIFTY closes at 5500, then Mr. X will make a profit on 5200 Mid-Month ITM Call Option of Rs. 3250. [(300-235)*50]

His net payoff will result in a profit of Rs. 4500. (1250+3250)