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+Chapter 14: Diagonalizing a Spread 239 
+In summary, the diagonal bull spread may often be an improvement over the 
+normal bull spread. The diagonal spread is an improvement when the stock remains 
+relatively unchanged or falls, up until the near-term written call expires. At that time, 
+the spread can be converted to a normal bull spread if the stock is at a favorable price. 
+Of course, if at any time the underlying stock rises above the higher striking price at 
+an expiration date, the diagonal spread will be profitable. 
+OWNING A CALL FOR "FREE" 
+Diagonalization can be used in other spread strategies to accomplish much the same 
+purposes already described; but in addition, it may also be possible for the spreader 
+to wind up owning a long call at a substantially reduced cost, possibly even for free. 
+The easiest w~y to see this would be to consider a diagonal bear spread. 
+Example: XYZ is at 32 and the near-term April 30 call is selling for 3 points while the 
+longer-term July 35 call is selling for 1 ½ points. A diagonal bear spread could be 
+established by selling the April 30 and buying the July 35. This is still a bear spread, 
+because a call with a lower striking price is being sold while a call at a higher strike 
+is being purchased. However, since the purchased call has a longer maturity date 
+than the written call, the spread is diagonalized. 
+This diagonal bear spread will make money ifXYZ falls in price before the near­
+term April call expires. For example, ifXYZ is at 29 at expiration, the written call will 
+expire worthless and the July 35 will still have some value, perhaps ½. Thus, the prof­
+it would be 3 points on the April 30, less a 1-point loss on the July 35, for an overall 
+profit of 2 points. The risk in the position lies to the upside, just as in a regular bear 
+spread. If XYZ should advance by a great deal, both options would be at parity and 
+the spread would have widened to 5 points. Since the initial credit was 1 ½ points, the 
+loss would be 5 minus 1 ½, or 3½ points in that case. As in all diagonal spreads, the 
+spread will do slightly better to the downside because the long call will hold some 
+value, but it will do slightly worse to the upside if the underlying stock advances sub­
+stantially. 
+The reason that a strategist might attempt a diagonal bear spread would not be 
+for the slight downside advantage that the diagonalizing effect produces. Rather it 
+would be because he has a chance of owning the July 35 call - the longer-term call -
+for a substantially reduced cost. In the example, the cost of the July 35 call was 1 ½ 
+points and the premium received from the sale of the April 30 call was 3 points. If 
+the spreader can make 1 ½ points from the sale of the April 30 call, he will have com­
+pletely covered the cost of his July option. He can then sit back and hope for a rally