Our diagonal LEAPs services look to trade spreads
by purchasing an In the Money (ITM) 1-year or 2-year LEAPs and then selling
At the Money (ATM) or Out of the Money (OTM) near term calls against the LEAPs.
Basically, this strategy is a leveraged covered call position since the investor
will pay less for the LEAPs than they would to own the stock. Since the ITM
LEAPs will always cost more than the premium collected on the short call,
the position is a debit spread.
Here is a breakdown of a Diagonal LEAPs spread position
 Buy a long call
at a given strike price (lower strike price).
Sell a near month
call one or more strikes above the long call.
The net investment
is the net debit (difference in premiums).
The maximum risk is
the net debit (difference in premiums).
The maximum profit
is realized if the stock is trading at the short strike price at short term expiration.
Maximum profit is equal to the value of the long option at short term expiration minus
the net debit.
The break even point
is the point at which the value of the bought call will equal the net debit.
A profit is realized at any price above the
break even point.
On the next page we will look at an actual example.
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