A bullish diagonal spread is an advanced option trade and generally not suitable for beginners, but it can have its place within an option portfolio.

It is a bullish strategy that benefits from time decay and is best placed when volatility is low, such as the current conditions.

The strategy involves buying a long-term call and selling a monthly out-of-the-money call against it.

The trade is best placed when the trader has a bullish outlook and thinks the stock could get to the short call strike by the first expiration date.

A rise in implied volatility will benefit the trade as it has positive Vega overall.

The big risk with the trade is a sharp move lower early in the trade.

Let’s look at an example using Uber Technologies (UBER).

UBER Stock Bullish Diagonal Example

Uber Technologies is looking reasonably strong compared to the broader market and is rated a Buy. The Barchart Technical Opinion rating is a 40% Buy with an Average short term outlook on maintaining the current direction.

Let’s look at how we can use options to find a favorable risk to reward trade on the assumption that UBER stock might rally to $80 in the next five weeks.

We will look at a bullish diagonal spread which allows traders to get long UBER without risking too much capital.

A bullish diagonal spread is a trade that involves buying a long-term call option and selling a shorter-term, further out-of-the-money call option.

Structuring the trade at $80 gives the trade around 33 delta, which is roughly equivalent to being long 33 shares of the stock.

Selling the May 16st $80-strike call option will generate around $205 in premium and buying the August 15th, $70-strike call will cost around $995.

That results in a net cost for the trade of $790 per spread, which is the most the trade can lose.

The estimated maximum profit is around $600, but that can vary depending on changes in implied volatility. The maximum profit would occur if UBER closes right at $80 on May 16th.

The trade benefits from time decay as the short-term option will decay at a faster rate than the longer-term option.

The ideal scenario for this UBER trade is for the stock to move towards $80 in the next few weeks.

A bullish diagonal spread is a good way to gain some upside exposure on a stock without risking too much if the move doesn’t eventuate.

The suggested stop loss level is a close below $65.

Here is a visual of what the trade looks like:

Company Details

Uber Technologies Inc. provides a platform which allows users to access transportation and food ordering services.

The Company's operating segments consist of Core Platform and Other Bets.

The Core Platform segment consists of Ridesharing and Uber Eats.

The Other Bets segment consists of Uber Freight and New Mobility platforms.

Uber Technologies Inc. is based in San Francisco, CA.

UBER rates as a Strong Buy according to 36 analysts with 3 Moderate Buy ratings and 9 Hold ratings.

Implied volatility is at 60.50% compared to a 12-month low of 29.20% and a 12-month high of 69.77%. 

Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.