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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: RP Svoboda who wrote (1661)7/29/2001 4:59:36 PM
From: BDR  Read Replies (1) of 5205
 
With the diagonal spread you describe (Long ITM LEAPS Calls and short near term OTM Calls) I would think you would want in most cases to continue to hold the LEAPS, letting the calls expire or rolling them up and/or out if they end up ITM at expiration rather than liquidating the entire position. In the example you gave you could by back the calls for a profit of 2. You would still have the, as yet, unrealized profit of 6 in the LEAPS position. You could then sell another call against that position at the same or higher strike price.

By buying deep ITM LEAPS you should be protected, in the event the stock runs away from you, by a higher delta for the LEAPS than the call. You will have a loss on the call but the gain on the LEAPS should be equal or higher than that loss. You could buy back the call, record the loss and sell another call (psychologically not as satisfying but realistically it shouldn't matter) or you could close out the entire position for, one hopes, a net gain.

If the call is ITM at expiration I don't think your broker will liquidate both the LEAPS and the call without express instructions from you. I think the call will be exercised, leaving you short the stock and long the LEAPS.

dDR, who thought he would do diagonal spreads with ITM RMBS LEAPS and now finds himself long OTM LEAPS :(
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