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Strategies & Market Trends : Option Strategies
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To: Joseph Silent who wrote (2166)7/24/2020 10:29:40 AM
From: TheNoBoB  Read Replies (1) of 2591
 
The risk with a diagonal like this is if the short call is exercised before expiration, you'll be short the stock at that strike price. If you don't have funds available to cover the short, you'll have to exercise the long call, which may result in losing any extrinsic premium still in that long option.

Usually, this trade would be structured with a deeper in-the-money call which has much less extrinsic value, but it can work out this way as well as long as you don't get a runner.

If both options are ITM at expiry, your broker will automatically exercise both. But if the stock finishes between your strikes, you'll likely run into the situation I described above.
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