Identify which contract parameter changes
The examples below all use one long call and one short call. The word diagonal describes the relationship between strikes and expirations, not a guaranteed bullish exposure. Reversing the legs, changing the strikes or using puts changes the risk. The rest of this page analyzes the specific long-call diagonal shown here.
- Use the same underlying, currency, contract multiplier and compatible deliverable. Two symbols with similar names do not establish matching obligations.
- One short contract against one long contract is essential to this example. Selling extra short calls creates ratio exposure and invalidates its risk limits.
| Structure | Long call | Short call | What differs |
|---|
| Vertical | 95 strike, 30 days | 105 strike, 30 days | Strike only |
| Calendar | 105 strike, 90 days | 105 strike, 30 days | Expiration only |
| Diagonal | 95 strike, 90 days | 105 strike, 30 days | Strike and expiration |
Price a 90-day / 30-day call diagonal
Assume a hypothetical stock at $100, a 95 call with 90 calendar days remaining and a 105 call with 30 days remaining. Both implied volatilities are 25% annually. Use zero interest and dividend yield, a 365-day year, European exercise and a 100-share multiplier. Black-Scholes theoretical prices are used for entry and later marks. There are no fees, slippage or financing charges in these tables; none of the values is a market quote.
- For these zero-rate assumptions, C(S,K,T,σ) = S × N(d1) - K × N(d2), where d1 = [ln(S/K) + σ²T/2] / (σ√T), d2 = d1 - σ√T, and N is the standard normal cumulative distribution. T is remaining days / 365; σ = 0.25 means 25%.
- Before the first expiry, spread value V = C(long leg) - C(short leg). Pair P&L = 100 × (V - 6.647500854). Use unrounded leg values in calculations, then round the final dollars.
- A conservative opening execution estimate uses the ask to buy the long call and the bid to sell the short call. A midpoint or theoretical debit is a valuation assumption, not a promise that a two-leg order will fill there.
| Position | Model premium per share | Opening cash flow |
|---|
| Buy 1 × 95 call, 90 days | $7.731119 | -$773.11 |
| Sell 1 × 105 call, 30 days | $1.083618 | +$108.36 |
| Net debit | $6.647501 | -$664.75 |
Compute net delta, daily theta and vega
Sensitivities add with position signs: long-call Greek minus short-call Greek. For the stated model, delta = N(d1), theta per calendar day = -S × φ(d1) × σ / (2√T × 365), and vega per one percentage-point IV change = S × φ(d1) × √T × 0.01. Here φ is the standard normal density. These are local estimates at entry, with other inputs held constant.
- Multiply by 100: a small $1 stock rise initially adds about $42.32, one day adds about $1.41, and a parallel one-point IV rise adds about $8.40. These approximations are neither probabilities nor realized returns.
- Exact repricing after one day at unchanged spot and IV gives a $1.42 gain, close to but different from the $1.41 theta estimate. The remaining maturities become 89 and 29 days.
- Delta and theta change as spot moves. Near the short strike close to expiry, the short call can become very sensitive to small price moves. Above that strike its delta can approach one while the long call delta remains below one, making the spread temporarily negative delta.
| Sensitivity per share | Long 95 call | Short 105 call contribution | Net |
|---|
| Delta | +0.682698 | -0.259496 | +0.423202 |
| Theta: dollars per day | -$0.024576 | +$0.038708 | +$0.014132 |
| Vega: dollars per IV point | +$0.176945 | -$0.092900 | +$0.084045 |
Stress the two IVs separately
Net vega assumes a specified volatility move. The two expirations need not move together, and different strikes also carry different implied volatilities. The following results reprice both legs at entry with spot fixed at $100. A five percentage-point move from 25% to 30% is not a 5% relative change.
- The last row loses money even though one IV rises: the short option becomes more expensive while the long option is unchanged. Positive net vega does not protect against every change in the term structure.
- An earnings announcement, dividend or other event can affect the two maturities differently. Separate event exposure from a blanket assumption that the short leg always decays faster in dollar terms.
- Reprice sizeable shocks instead of multiplying a single Greek by a large move. The asymmetry between the first two rows comes from the nonlinear option-price function.
| Long-leg IV | Short-leg IV | Pair P&L from repricing |
|---|
| 20% | 20% | -$42.77 |
| 30% | 30% | +$41.42 |
| 20% | 25% | -$86.64 |
| 25% | 30% | -$48.28 |
At day 30, estimate the remaining 60-day call
At the short expiry, use P&L = 100 × [C(S,95,60/365,σL) - max(S - 105,0) - 6.647500854]. Only the short call is valued at intrinsic value. The long call still requires a model or an observable exit price. The table holds its remaining IV at 25% and assumes settlement or closing at the modeled values. It is a scenario valuation at the first expiry, not a fixed payoff for two expired options.
- At $105, strike width minus debit gives 100 × (10 - 6.647500854) = $335.25. The model instead gives $421.57 because the long call has $0.863166 of time value per share. Calling $335.25 the fixed maximum profit would discard that residual value.
- At the same $105 stock price, remaining long-leg IV of 20% gives $377.56 P&L; 30% gives $475.34. A first-expiry breakeven or profit peak therefore needs stated volatility and valuation assumptions.
- The $0 row is a limiting valuation, not a claim that a halted or worthless security can be traded at zero. In this unchanged matched structure the debit is the modeled downside loss; costs, assignment-related stock exposure and later changes require their own accounting.
- If the short expires and the long is retained, the position becomes a standalone long call. The day-30 mark is not realized cash, and the remaining call can subsequently expire worthless.
| Day-30 stock price | Long residual per share | Short intrinsic per share | Pair P&L |
|---|
| $0 | $0.000000 | $0 | -$664.75 |
| $80 | $0.163248 | $0 | -$648.43 |
| $95 | $3.839874 | $0 | -$280.76 |
| $100 | $6.934471 | $0 | +$28.70 |
| $105 | $10.863166 | $0 | +$421.57 |
| $115 | $20.121666 | $10 | +$347.42 |
| $130 | $35.003068 | $25 | +$335.56 |
The PMCC is a longer-duration call diagonal
A poor man's covered call uses an in-the-money long call in place of stock and sells a shorter-dated call at another strike. The call can provide substantial positive delta, but it has an expiry and time value, and it does not confer stock ownership or dividend entitlement. Neither a PMCC nor an ordinary covered call is risk-free.
- This uses the same zero-rate model as the earlier example. The long call has $30 intrinsic value and $0.718962 time value at entry. Its delta is near one but the combined position is not equivalent to holding 100 shares.
- The debit is below the $10,000 cash cost of 100 shares at $100, but that comparison says nothing about broker margin, suitability or return. The entire $2,963.53 can still be lost in the unchanged pair before costs.
- Each later short-call sale is a new trade against a long call with less time remaining. Keep buybacks, new credits, fees and the current long mark in a cumulative ledger. A roll credit does not erase a loss on the old short call.
| PMCC example at $100 spot | Model result |
|---|
| Buy 70 call, 365 days, 25% IV | $30.718962 per share; delta 0.939633 |
| Sell 105 call, 30 days, 25% IV | $1.083618 per share; delta 0.259496 |
| Opening debit, 100-share pair | $2,963.53 |
| Net delta, 100-share pair | +68.01 share equivalents |
| At day 30, spot $105 and long IV 25% | 335-day long call worth $35.379984; pair P&L +$574.46 |
Assignment can leave short shares and a live long call
The numerical examples use European valuation. Many equity options allow American exercise, so a short call may be assigned before the planned date. With no shares owned, one standard assigned short call can leave 100 short shares while the later-expiring long call remains open. The broker does not have to exercise that long call automatically for you.
- Review in-the-money short calls around ex-dividend dates, broker exercise deadlines and available buying power. A long call does not itself supply the shares needed for delivery until it is exercised or otherwise managed.
- Exercising the long call can obtain shares but forfeits remaining time value. Compare that cash requirement with selling the long call and buying shares to close the short, using actual available prices and broker procedures.
- Near the short strike at expiry, exercise instructions and later price moves can make the final stock quantity uncertain. A zero-intrinsic table row does not establish that assignment cannot occur.
- Closing the long call first leaves the short call unhedged. Closing or rolling either leg changes the exposure, so confirm both fills and remaining quantities before relying on the original spread analysis.
Build and audit the structure in TradingView Options
TradingView Options allows each leg's strike, expiration, direction and opening price to be edited. For a supported underlying, create a custom strategy with one long lower-strike call at the later expiry and one short higher-strike call at the nearer expiry. Verify the actual dates and size units rather than assuming a preset matches this diagonal.
- Select the price convention deliberately: TradingView documents bid, ask, midpoint and theoretical inputs. Preserve the entry debit when changing a later scenario, or the displayed P&L comparison loses its original cost basis.
- Inspect P&L and Greeks, then compare the first-expiry residual valuation with an independent calculation. Record the model assumptions and whether an IV change is relative or measured in percentage points.
- A scenario chart does not supply historical two-leg fills or confirm executable prices, assignment outcomes or broker margin. A stock-chart Pine strategy is not a historical diagonal-options backtest without the required contract and execution data.
Keep each leg's evidence with the trade plan
Pineify AI Stocks & Options Picker has an options-chain view organized by expiration and strike, with bid and ask fields where supplied. Inspect the two expirations separately and record each contract identifier, multiplier, strike, expiry, quote timestamp and price convention. Missing or stale data cannot be substituted with a zero premium.
- Use Trading Journal plan notes for the two-leg thesis, net debit, valuation date, separate IV assumptions, earnings and dividend dates, maximum allocation, and the intended response to short-call assignment.
- Use review notes for actual fills, fees, rolls, any delivered shares and the remaining long-call mark. Separate realized cash flows from model estimates when judging the trade.
- These product features support contract research and written records. They do not by themselves execute a diagonal, guarantee synchronized quotes, automatically reconcile option assignments or prove a historical return.
