The Diagonal Spread

1. Sell or wrote an option where the strike price is about 3 to 5 points or further out-of the money.
2. Buy an option that expires 1 month or more after the option you have sold that has a strike price that is 2 2/1 to 5 points from the strike that you sold.
3. Try to get a credit or, at the very least, a very small debit for the spread price.
4. Set a stop-loss that is slightly in the money of the option that you have sold ( i.e a 55 call would have a stop at 56)
5. Try to select a spread where the option you are writing has less than 2 months before expiration.
6. Exit the spread when the stop is hit or at the expiration of the option you wrote or it that option loses most of its value.
7. With this trade you get a free option, the option you bought initially, so you could hang on to it, if you wish, after the option you have sold expires.

Example Buy BUD Jan 60 call at 0.6
             Sell BUD Nov 55 call at 0.9

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