Bull diagonal spread (price-time spread)
| Range | Value |
|---|---|
Market expectation | Rising prices |
Construction | Call long with strike price E1 (longer term) |
Profit potential | Limited |
Risk of loss | Limited |
Time effect | Positive |
Volatility effect | (Slightly) Positive |
Market expectation
A bull-diagonal spread consists of options of the same type, but with different terms and strike prices.
Similar to the bull price spread, you are speculating on rising prices here.
Construction
Bull diagonal spreads with calls consist of a call long with strike price E1 and a longer term and a call short with strike price E2 (>E1) and a shorter term.
Bull diagonal spreads with puts consist of a put long with strike price E1 and a longer term and a put short with strike price E2 (>E1) and a shorter term.
Profit potential
Bull diagonal spreads have limited profit potential. The profit is maximum if the price of the underlying is quoted at E2 at the end of the shorter term.
Risk of loss
The maximum loss of a bull price spread with calls is limited to the difference (paid) between the premiums.
Time effect
As the loss in fair value accelerates as the remaining term decreases and the shorter-term option is sold, a positive fair value arises in the middle price range.
Volatility effect
The volatility effect of the overall position is largely neutral, but as the purchased option has a longer term, it is more strongly influenced by changes in volatility. This creates a slightly positive effect.