What Is a Diagonal Spread?
A diagonal spread uses two options with different strike prices AND different expiration dates. When the long leg is a LEAPS option, you create a structure that generates recurring income from the short leg while the LEAPS provides long-term directional exposure.
The most common version is a call diagonal: long a deep ITM LEAPS call, short a near-term OTM call. This is also known as a poor man's covered call, but the broader diagonal spread concept includes more variations.
This guide focuses on the bullish call diagonal (long deep ITM LEAPS call, short near-term OTM call) since it is the most widely used variant.
Setting Up a Call Diagonal
Example on META at $520:
Long leg: Buy $430 strike LEAPS call, January 2028, for $110. Delta: 0.82. Short leg: Sell $540 strike call, 35 days out, for $11. Delta: 0.28.
Net debit: $99 ($9,900 per spread).
Maximum profit scenario: META rises to $540 at the short call's expiration. The LEAPS has appreciated, the short call expires just at-the-money, and you keep the full $11 premium. You then sell another call for the next cycle.
Breakeven at short call expiration: Approximately $529 (varies with time value remaining on LEAPS). The stock needs to be roughly at this level for you to break even if you closed the entire position.
Income Generation Mechanics
Each month (or every 30-45 days), you sell a new short call against your LEAPS. The premium collected reduces your cost basis in the LEAPS.
Monthly income tracking example:
| Month | Short Strike | Premium Collected | Cumulative Income |
After six months, you have collected $58.50 in premium, reducing your net LEAPS cost from $110 to $51.50. If the LEAPS has also appreciated due to stock gains, your total return is even better.
Managing the Short Leg
When the short call is losing value (stock below short strike): You can either let it expire worthless or buy it back at 50-75% profit and sell a new one immediately. The "buy back at 50% profit" approach is popular because it captures most of the premium without risking a reversal.
When the short call is being tested (stock near short strike): Roll up and out: buy back the current short call and sell a new one at a higher strike with a later expiration. Try to do this for a net credit. If you cannot get a credit, rolling for even money or a small debit is acceptable to avoid assignment.
When the stock gaps above your short strike: Evaluate closing the entire position. If the LEAPS has profited enough, taking the full position off for a gain is often the best move. Do not chase the stock higher by rolling into increasingly poor positions.
Common Pitfalls
Selling short calls below your breakeven. Your short call strike must always be above your net cost in the LEAPS. Over-rolling in a rallying market. If you keep rolling up and out, each roll becomes more expensive. Know when to close and take profit. Ignoring the LEAPS expiration. Roll the LEAPS when it has 6-9 months remaining.
OptionsPilot tracks diagonal spread positions by pairing your long and short legs, showing net P&L, breakeven, and alerting you when it is time to roll either leg.
Who Should Use This Strategy?
Diagonal spreads with LEAPS are ideal for traders who: