Mastering Derivatives: Bull Call Spread vs. Diagonal Spread

Previously we discussed why going long on a lower strike call of almost a week and going short on a higher call of next week on the Nifty Index may not be optimal. This week we explore the converse of this strategy. What if we go long on next week’s lower strike call and short on almost a week’s higher strike call? We call this strategy the diagonal spread and compare it to a bull-call spread for a particular view of the underlying asset.

Spread the costs

Suppose you expect the Nifty Index to encounter resistance at 26718. A bull call spread would involve going long the 26400 call near the week (January 13) and short the 26750 call with the same expiration date. You can also short the 26800 call if you prefer to avoid the 50-strike option. The reason for this is that there is less demand for 50 strike options, which leads to lower implied volatility. Keep in mind that higher implied volatility is preferable when shorting options. The 26400/26750 spread can be set to a net depreciation of 108 points. If the Nifty Index were to trade at 26718 at expiry, the call at 26400 will have 318 points of intrinsic value and the call at 26750 will expire worthless. The maximum profit on the spread is therefore 210 points. If the Nifty Index were to reach the price target two days before expiry and you then close the position, the maximum gain on the spread could be 178 points.

Now suppose you instead go long on next week’s 26400 call (January 20) and short on almost week’s 26750 call. The spread can be set to a net depreciation of 184 points. If the Nifty Index were to trade at 26718 at almost a week’s expiration, next week’s 26400 call could be worth 380 points and the 26750 strike would expire worthless. So the maximum win will probably be 196 points. If the Nifty Index were to hit the price target two days before expiry, the spread could gain 170 points. This again shows that the bull call spread can yield greater potential profits than the diagonal spread. Keep in mind that the intrinsic value of an option moves one-to-one with the underlying asset. Therefore, both 26400 calls for the nearby week and the calls for the next week offer the same intrinsic value for the given price target. Thus, the difference in profits between the diagonal spreads and the bull call spreads can be attributed to time decay and the spread cost. The time decay is marginally different. The cost of setting up the diagonal spread is much higher due to the long call position with a longer duration.

Optional reading

The discussion shows that it is better to set a bull call spread than a diagonal spread if you expect the underlying asset to quickly rise to an identifiable overhead resistance level. The next week option could have lower implied volatility than the near week option due to lower demand. While this favors the long position, the absolute higher call premium can hurt spread profits in the longer term.

(The author offers training programs for individuals to manage their personal investments)

Published on January 10, 2026