No. of Recommendations: 2
I assume by diagonal spread, you mean buy outer month Deep in the money call and sell near month at the money or slightly higher than the current price of the underlying.

Actually what I buy are typically very-long-time LEAP DITM calls (as deep as it's practical while remaining reasonably liquid in terms of bid-ask spreads) on which to repeatedly write not-too-short-term just-OTM calls (I'd rather not write every month, despite the higher TV/day this may appear to offer). There are multiple reasons for this, but, again, I don't think a board on "bonds and fixed income" is the appropriate venue, as such strategies' income is anything but fixed and their behavior pretty much uncorrelated with bonds (I do have a substantial allocation to debentures -- mostly bonds/fixed income, but there's nothing wrong with floating-rate senior loans either, though they're not fixed income nor are they bonds either, whence my preference for the broader, more accurate term "debentures").

What you are essentially doing here is substituting the underlying with the deep in the money calls. Basically reducing your capital commitment and due to low volatility you pay low premium. One has to recognize the risk profile of such strategy is higher than buy-write, of course provides much higher income due to limited capital deployment.

Actually the capital-at-risk in buying a DITM call is lower than in buying 100 shares -- if the company goes bankrupt you "only" lose the premium paid for the call, which, as you say, is less capital than you put at risk buying equity. The `risk` as weirdly defined in much of financial literature -- as equivalent to volatility -- is indeed higher, but, to me, `risk` has to do with permanent impairment of capital, not with daily or weekly fluctuations up and down:-).

But, again, this has little to do with bonds, or fixed income. There IS a free TMF board about options, and I think that's where (if anywhere) the discussion should be...
Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.