236  •   The Intelligent Option Investor
Because we must fully margin a short-put investment, that leg of 
the long diagonal carries with it a loss leverage ratio of –1.0. However, the 
OTM call leg represents an immediate realized loss coupled with a very 
high lambda value for gains. As such, if the put option expires ITM, the 
long diagonal is simply a levered strategy; if the put option expires OTM, 
the investment is a very highly levered one because the unlevered put 
ceases to influence the leverage equation. Another short put may be written  
after the previous short put expires; this further subsidizes the cost of the 
calls and so greatly increases the leverage on the strategy.
If the stock moves quickly toward the upper valuation range, this 
structure becomes extremely profitable on an unrealized basis. If the put 
option expires ITM, the investor is left with a levered long investment in 
the stock in addition to the long position in the OTM. As in any other 
complex structure, the investment may be ratioed—for instance, by buying 
one call for every two puts sold or vice versa.
Strike Price Selection
The put should be sold ATM or close to ATM in order to maximize the time 
value sold, as explained earlier in the short-put summary. The call strike may be 
bought at any level depending on the investor’s appetite for leverage but is usu-
ally purchased OTM. The following table shows the net debit or credit associated 
with the long diagonal between the ATM put ($55 strike price, delta of –0.42, 
priced at the bid price) with an expiration of 79 days and each call strike (at the 
ask price) listed, all of which are long-term equity anticipated securities (LEAPS) 
having expirations in 534 days. The lambda figure for the OTM calls is also given 
to provide an idea of the comparative leverage of each call option. For this exam-
ple, I am using JP Morgan Chase (JPM) when its stock was trading for $56.25.
Strike Delta (Debit) Credit Call Lambda (%)
57.50 0.43 (2.52) 5.6
60.00 0.37 (1.57) 6.1
62.50 0.31 (0.76) 6.7
65.00 0.26 (0.25) 7.0
70.00 0.16 0.78 8.4
75.00 0.10 1.28 9.5
80.00 0.06 1.56 10.5