Diagonal Spread Set-Up In Nike

Sometimes I favor diagonal call spreads over taking hold of stock due to the considerable buying power reduction and return on capital. So basically instead of buying stock, one can buy call spreads where the long call is a good 6 to 12 months out and in the money and the short component is usually only one month out of the money. I like to buy these spreads in stocks that have ultra low implied volatility, depressed sentiment and are oversold from a momentum perspective. Furthermore,  Nike (NYSE:NKE) is a company with strong competitive advantages so if this position was to go against us initially, one could roll down the long call and keep selling short premium against this position to reduce the cost basis over time.

The critical issue with these spreads is that you must allow yourself enough time to be right. The long call has to be far enough away to ensure you are giving the spread enough time to work. Low volatility is your friend in diagonals as when it invariably rises, the positive delta of the spread will ensure that the long call will increase in price much quicker than the short call.

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