Call diagonal

The construction

Buy a longer 95 call and sell a nearer 105 call. A ten-point strike gap does not establish a fixed ten-point maximum payoff because the two contracts do not expire together.

Two clocks and two volatility assumptions

The short expires 2026-11-20, 45 days after entry. The long expires 2027-02-19, 136 days after entry. Opening example prices use 30% front IV and 25% back IV, continuous rate 3% and yield 1%. Ticket premiums are rounded to cents and those rounded values define opening cash.

A front-event IV decline and a back-expiry IV decline affect different rights. A single aggregate Vega cannot describe every nonparallel term-structure change. The future long-option mark also depends on remaining time, spot and the assumed volatility surface.

Read the observation date before the curve

At the short expiry, the long option is still alive. Valuing both by intrinsic at that date deletes the very time value the calendar or diagonal purchased. The three curves therefore show alternative remaining-IV assumptions rather than one guaranteed payoff.

The demonstration uses European cash-settled valuation and assumes both legs are liquidated at the short-expiry observation. Real American equity options may be assigned earlier and create share obligations. A later option does not automatically settle an earlier assignment.

Management

If spot rallies beyond the short strike, compare closing values before exercising. Exercising a still-live long can sacrifice extrinsic value. Each new short-call sale needs a fresh risk and thesis check.

A priced two-expiry walkthrough

Buy one 2027-02-19 95 call at 9.16; sell one 2026-11-20 105 call at 2.34. Both represent 100 units. Opening debit is $682.00 before the illustrative 1.30 entry fees.

At the short-expiry observation, keep stock at 100 and assume 25% IV for the remaining long. Price the long with 91 days left and subtract the short's intrinsic liability. After subtracting the original debit, modeled liquidation P/L is $121.97 before costs or $120.67 after entry fees only.

With stock unchanged but remaining IV at 18%, the result is $4.67. At 35% it is $301.14. The comparison isolates uncertainty still owned after the nearer clock ends. It does not establish a unique maximum profit or an executable fill. Exit fees, bid–ask costs and assignment can change the outcome.

Open the calculation without leaving this lesson

Check your understanding

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