# Diagonal Bull Spread

**Diagonal bull spread** is the option strategy with limited risk and profit, which lies in the simultaneous buying and selling 2 calls on one asset with higher/lower strikes and longer/shorter expiration.

This option strategy is usually used when an investor is bullish on the market in the long-term but has neutral outlook in the near term. For this purpose, he buys a call to earn profit from the upward movement and sells another call with a closer expiration date. So, an investor wants at first the underlying asset price to stay around front-month strike and then when the short-term call expires worthless, he can write one more contract and repeat this process until the back-month option expires to reduce the overall cost of the trade by receiving the premiums.

Suppose, when the underlying asset price is $120, someone executes diagonal call spread by buying the NOV $120 call for the premium of $250 and selling another AUG $130 call for the premium of $100. So, the debit is $150. If the price increases to the level of $125 and closes at this mark at the expiration date in November, this long-term option has $500 in intrinsic value. Suppose, in case of selling 2 more options with the same strikes and premiums when previous short-term contracts expire, an investor receives $200 ($100*2). Thus, his total profit is $550 ($500+$200-$150). If the price declines to the level of $90 and stays at this mark till November, an investor won’t be able to write additional options and will suffer losses which equal $150 (entire investment).