Let's say company A is currently trading at 100.

I bought to open 10 puts for company A at 100 strike price in Jan 2015.

What risk am I exposed to by selling shorter term weekly puts (strike < 100) against that position?

For example, I sell to open 10 puts at 90 strike price that expire this week. If at the end of the week, the stock ends at 95, I pocket the premium. On the other hand, if the stock ends at 85, shouldn't my broker be able to convert my long puts to cover it?

Seems like it should work like a covered call... but can't find the name of this strategy by searching in google.

2 Answers 2


Figured it out. Diagonal spread


As you figured out, it's a diagonal spread. Buying a long dated call LEAP and writing shorter dated further OTM calls against it is often called the Poor Man's Covered Call (PMCC) because it has a similar performance to a covered call.

The advantage of a PMCC is that since less capital is necessary, it has a higher ROI and lower risk (the price of the underlying collapses).

You must be careful not to sell PMCCs that lock in a loss. That occurs if the cost of the position exceeds the difference in strikes. For example:

XYZ = $50 $50 call LEAP = $4.25 $52.50 two month call = 50 cents

The cost is $3.75 and if XYZ zooms up and you exercise you LEAP to cover the assigned short call, you only get back $2.50. You could mitigate this if XYZ rose slowly (roll short calls up) but not if it gapped up a lot.

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