Strategies · Library · Options
§2.20Carry
Diagonal call spread
Hold a deep in-the-money, longer-dated call that moves almost like the stock, and keep selling short-dated out-of-the-money calls against it for income. A cheaper stand-in for a covered call.
- Asset class
- Options
- Held for
- Varies
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Bullish: expects a steady grind higher while the short calls expire worthless.
- Entry and exit
- Buy a deep in-the-money call with a long expiry; sell an out-of-the-money call with a shorter expiry at a higher strike. At each short expiry sell the next short call if the stock is above the stop level; unwind otherwise.
- Sizing
- 1:1 (one long far-dated call, one short near-dated call at a higher strike)
How it fails
- Maximum loss is the net debit paid
- Gain capped around the short strike at its expiry
- A falling stock erodes the long call
- Time decay helps the short leg; early assignment possible
Data it needs
- options chain with strikes and premiums
- implied volatility by strike and expiry
- underlying daily price
ARCANE has the underlying daily close but no options chains, strikes or implied volatilities
How ARCANE uses it
Matches a steady-rise Call over several months that is not expected to spike. Paper only.
Mixed expiries and strikes need options.
Filed under the carry card
Own what pays more than it costs to finance (the return if prices stand still) and sell what pays less, across currencies, bonds, commodities and stock indexes.
A paper plan from this card holds 21 to 252 days, stops at 2× the expected move and uses at most 75% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.20, p. 26 of the SSRN version. Described in our words. Carry is ARCANE’s filing, not the book’s.