Diagonal Spreads will be a major part of my Wealth Builder. More specifically my Stock Alternative Portfolio.
Diagonal Spreads will be a very important strategy I’ll use with my Stock Alternative Portfolio positions.
If you haven’t already read my Wealth Builder section, please do so. There are 7 pages ending with the Wealth Builder Portfolio page. On this page you will find 3 portfolios: 5 Star Trading Portfolio, Pillar of Strength Portfolio and the Stock Alternative Portfolio. The Stock Alternative Portfolio will hold LEAPS options. At the present time there are 2 LEAPS positions in the portfolio. A LEAPS with Walmart, and one with Marvel.
The Walmart (WMT) LEAPS I bought on 12/2/19. It’s a $120 Strike Price option to expire on 1/21/22.
To review, a Diagonal Call Spread is selling a Short option against a Long option. The Long option must have an Expiration Date further out than the Short option you sell. Also, the Long option must have a Strike price lower than the Short option. Take a look at the 2 options below. The Long Call has a Strike Price of $120 and the Short Call has a Strike of $125. This means if I get assigned on my $125 Short Call I have the right to buy the shares at $120. Also notice my Long Call does not expire until Jan of 2022 and the Short Call expires in about a month. The Short Call is the one I sold today for a $250 premium.
The Diagonal Call Spread I also call a Stock Alternative Covered Call. I’m covering the Short Call with an option and not the stock.
Walmart Long Call Option
12/2/19 – Buy to Open 10 WMT 1/21/22 $120.00 C @ $13.50 ($13,500)
Walmart Short Call Option
12/16/19 – Sell to Open 10 WMT 1/10/20 $125.00 C @ 25¢ (+$250)
Why did I make this trade? This trade gives me a 25¢ premium, not so much for a 1 month trade! So Why do I like this trade so much?
I bought the Long Call on 12/2 because I feel WMT is going higher. I’m in this position as a stock alternative. To buy 1000 shares of WMT at 120 it would cost me $120,000. I bought the 10 contract Call, controlling 1000 shares of the stock, for $13,500. A little bit less of an investment.
While holding this WMT LEAPS I can sell Diagonal Spreads to bring in premiums, making Stock Alternative Covered Call. I’m in these Diagonal Spreads for the premium only, not to get assigned. This is why I went out on the Strike Price to $125. With the stock at $120 I don’t feel the stock will move to $125 in the month. I went out enough to where I won’t get assigned, but I still get a nice premium. This is not my normal premium of “1 Week/1%” but I’m bringing in money while I own the LEAPS. I look at this as a dividend. I paid $13,500 for the LEAPS. I brought in a premium of $250. This is a 1.85% Rate of Return for a 26 day option. If I hold this WMT LEAPS for a year, and sell an option once a month, my Rate of Return will be 22% on the year.
I do not think WMT will hit $125 in 26 days, but anything can happen. If it does, I deliver the stock and start again.
This Stock Alternative Covered Call get a Risk Factor 1. There will not be much risk.
This will be a great way to bring in money while holding LEAPS positions in my Stock Alternative Portfolio.
If you have any questions on this strategy please send me an email. This will be a great strategy for someone who doesn’t have the time to trade every day.
This strategy also has a huge benefit if you work on margin. When owning a LEAPS you can sell Calls and it will not lower your margin by much. If I didn’t own this LEAPS on WMT my margin would have been lowered by $120,000, the price of the stock. Owning the “Right” to buy the stock is looked at the same as owning the stock.
Successful trading,
Steve
The Options Coach
I think you have a great page–with the WMT spread that you speak about do you have to own the stock or just the leaps and when you say deliver the stock would you then have to buy the 1000 shares for delivery or just sell the leap?
Hi Arnold,
Thanks for reading. With a Diagonal Call Spread you do not own the stock. You only own the Leaps, which is a Call Option. When I say deliver the stock, yes you would have to buy the stock to deliver it. That’s why I went with the $125 Strike Price; I don’t think the stock will hit that price in 26 days. If it does, I have to deliver!
You can sell the LEAPS but that will not give you the shares to deliver, but it will give you a profit because the stock went up. You can exercise the LEAPS, and buy the shares to deliver. My LEAPS has a Strike of $120. If I exercise my right to buy the stock, I’ll buy the shares at $120 and deliver them to my Call buyer at $125. In this case your profit would be the $5 on the stock, plus the premium you made selling the Call. Minus what you paid for the Long Call (LEAPS).
You can also close the Short Call with a “Buy to Close.” The stock is higher so you would lose money on the premium and still own the LEAPS.
You can also do a Roll-Out with the Short Call so you don’t have to deliver the stock.
It can get complicated. That’s why I pick a Strike where I hope (and pray lol) I don’t get assigned.
There are some many things you can do with options. I love this game!
I hope this helped. If it’s not clear send me an email and I’ll explain better.
Steve
Thanks for the response I have been playing options for a couple of years but with a small account so I only play directional bets mostly on the spy. Love your analysis and insight