What makes it a diagonal

A calendar = same strike, different expiries. A vertical = different strikes, same expiry. A diagonal = different strikes AND different expiries.

Diagonals inherit from both — you get the theta capture of a calendar and the directional bias of a vertical.

The “poor man’s covered call” (PMCC)

The most popular retail diagonal:

Buy a deep-ITM long-dated call (2-3 months out — the furthest liquid monthly in Indian markets)
Sell an OTM short-dated call (weekly or monthly)

Behaves like a covered call but at 30-40% of the capital.

A worked example

Example

Reliance PMCC (Poor Man's Covered Call)

Reliance at ₹3,000. Instead of buying 250 shares (₹7,50,000), you diagonal:

Buy Reliance 2,700 CALL (3 months out) @ ₹380 → −₹95,000 (this is your “synthetic stock”)
Sell Reliance 3,100 CALL (monthly) @ ₹40 → +₹10,000

Net cost: ₹85,000 (vs ₹7.5L for real covered call — ~11× capital efficiency)

If Reliance stays at 3,000 through the short call’s expiry:

Long call still worth ~₹340 (bit of time decay + minor delta hit)
Short call worthless
Realized income: ₹10,000 (12% return on your ₹85K in one month)

Then you sell the next month’s OTM call for another ₹10,000. And the next. As long as Reliance doesn’t rocket past 3,100 quickly, you generate monthly income at a fraction of the real covered call’s capital.

If Reliance climbs to 3,200 during the short call’s life:

Long call worth ~₹520 (delta gain on your synthetic stock)
Short call now worth ~₹120 (loss on the short)
Net position value: 520 − 120 = 400 vs original 340 = still up ~₹6,000

You cap your upside at 3,100 for the month but participate below that.

The math

Diagonal spread mechanics

Net cost = Long premium (long-dated) − Short premium (short-dated)

Ideal: near-max profit if short expires worthless while long holds most of its value

Max loss = Net cost (if long call collapses)

Break-even: complex — depends on time and vol at short expiry

Types of diagonals

1. Long call diagonal (bullish, income): PMCC above 2. Long put diagonal (bearish, income): mirror of PMCC for downside plays 3. Diagonal short strangle: sell weekly OTM, buy monthly further-OTM — extended-time protection with weekly income

When to use

Want covered-call income but don’t have full stock capital
Long-term bullish/bearish but want monthly cash flow
Post-event trades: sell short-dated after IV crush; long-dated benefits from IV normalization

When not to use

Strong bullish view — the short call caps upside; better to just own stock
Bearish on the sector — don’t diagonal what you don’t want exposure to
Illiquid strikes — diagonals require decent liquidity across two expiries
Right before earnings on the short leg — assignment risk from IV crush

Rolling the short leg

The whole point of a PMCC is repeated income. After the short expires (or you close it):

Assess long call — is it still healthy?
Sell the next expiry’s OTM call at a similar delta (~0.30)
Collect premium, hold long leg, repeat

If the short leg goes ITM before expiry:

Roll up and out: buy back, sell a further-OTM strike in the next expiry for credit
Take assignment: if you don’t mind being called on the short (loss on that leg, but long call has appreciated too)
Close everything: take the P&L, restart if you want

Realistic monthly returns

For a ₹85,000 PMCC on Reliance:

Monthly premium: ₹8,000-15,000 depending on IV
Monthly return on cost: 10-18%
Big-move risk: if Reliance drops 15%, your long call could lose 40%+

Annualized return in flat markets: 60-100% on capital. With realistic drawdowns and losing months: 30-50% net.

Sounds amazing until you have a bad month where you lose 30%. Position sizing matters.

⚠️ Long leg is not stock

Your long ITM call decays too. Slower than short-dated options, but decay accelerates in the last 30 days. Plan to roll the long leg or close before its final month. Standard rule: roll long leg when it has 30 days left. This is particularly important in India where long-dated liquidity is thin.

Try it

Payoff calculator can’t show diagonals directly (multi-expiry). Use a broker platform with a diagonal simulator — Zerodha’s Sensibull handles them well.