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+240 Part II: Call Option Strategies 
+by the underlying stock. If such a rally occurred, he could make unlimited profits on 
+the long side. If it did not, he loses nothing. 
+Example: Assume that the same spread was established as in the last example. Then, 
+if XYZ is at or below 31 ½ at April expiration, the April 30 call can be purchased for 
+1 ½ points or less. Since the call was originally sold for 3, this would represent a prof­
+it of at least 1 ½ points on the April 30 call. This profit on the near-term option cov­
+ers the entire cost of the July 35. Consequently, the strategist owns the July 35 for 
+free. If XYZ never rallies above 35, he would make nothing from the overall trade. 
+However, if XYZ were to rally above 35 after April expiration (but before July expi­
+ration, of course), he could make potentially large profits. Thus, when one establish­
+es a diagonal spread for a credit, there is always the potential that he could own a call 
+for free. That is, the profits from the sale of the near-term call could equal or exceed 
+the original cost of the long call. This is, of course, a desirable position to be in, for if 
+the underlying stock should rally substantially after profits are realized on the short 
+side, large profits could accrue. 
+DIAGONAL BACKSPREADS 
+In an analogous strategy, one might buy more than one longer-term call against the 
+short-term call that is sold. Using the foregoing prices, one might sell the April 30 for 
+3 points and buy 2 July 35's at 1 ½ points each. This would be an even money spread. 
+. The credits equal the debits when the position is established. If the April 30 call 
+expires worthless, which would happen if the stock was below 30 in April, the spread­
+er would own 2 July 35 calls for free. Even if the April 30 does not expire totally 
+worthless, but if some profit can be made on the sale of it, the July 35's will be owned 
+at a reduced cost. In Chapter 13, when reverse spreads were discussed, the strategy 
+in which one sells a call with a lower strike and then buys more calls at a higher strike 
+was termed a reverse ratio spread, or backspread. The strategy just described is 
+merely the diagonalizing of a backspread. This is a strategy that is favored by some 
+professionals, because the short call reduces the risk of owning the longer-term calls 
+if the underlying stock declines. Moreover, if the underlying stock advances, the pre­
+ponderance of long calls with a longer maturity will certainly outdistance the losses 
+on the written call. The worst situation that could result would be for the underlying 
+stock to rise very slightly by near-term expiration. If this happened, it might be pos­
+sible to lose money on both sides of the spread. This would have to be considered a 
+rather low-probability event, though, and would still represent a limited loss, so it 
+does not substantially offset the positive aspects of the strategy.