Diagonal Call

The Diagonal Call is a variation of a Covered Call where you substitute the long stock with a long-term deep In the Money long call option instead. This has the effect of reducing the investment, thereby increasing the initial yield.
The Diagonal Call solves the problems experienced with the Calendar Call, in that the shape of the risk profile (see the following) is more akin to the Covered Call, which is what we want.
Buy a deep ITM (lower strike) long-term expiration call.
Sell a higher strike short-term call (say monthly)

Rationale

To generate income against your longer term long position by selling calls and receiving the premium.

Net Position

This is a net debit transaction because your bought calls will be more expensive than your sold calls, which are OTM and have less time value.
Your maximum risk on the trade itself is limited to the net debit of the bought calls less the sold calls.
Your maximum reward occurs when the stock price is at the sold call (higher) strike price at the expiration of the sold call.

Effect of Time Decay

Time decay affects your Diagonal Call trade in a mixed fashion.
It erodes the value of the long call but helps you with your income strategy by eroding the value faster on the short call.

Time Period to Trade

You will be safest to choose a long time to expiration with the long call and a short time for the short call.

Breakeven Down = Depends on the value of the long call option at the time of the short call expiration

Breakeven Up = Depends on the value of the long call option at the time of the short call expiration

Steps In

Try to ensure that the trend is upward or range bound and identify a clear area of support.

Steps Out

Manage your position according to the rules defined in your Trading Plan.
If the stock closes above the higher strike at expiration, you will be exercised. You will sell your long call, buy the stock at the market price, and deliver it at the higher strike price, having profited from both the option premium you received and the uplift in the long option premium.
If the stock remains below the higher strike but above your stop loss, let the short call expire worthless and keep the entire premium. If you like, you can then write another call for the following month.
If the stock falls below your stop loss, then either sell the long option (if you’re approved for Naked Call writing) or reverse the entire position.

Exiting the Position

With this strategy, you can simply unravel the spread by buying back the calls you sold and selling the calls you bought in the first place.
Advanced traders may leg up and down as the underlying asset fluctuates up and down.
In this way, you can take incremental profits before the expiration of the trade.

Mitigating a Loss

Unravel the trade as described previously.
Advanced traders may choose to only partially unravel the spread leg-by-leg.
In this way, they will leave one leg of the spread exposed in order to attempt to profit from it.

Advantages

Generate monthly income.
Can profit from range bound stocks and make a higher yield than with a Covered Call.

Disadvantages

Capped upside if the stock rises.
Can lose on the upside if the stock rises significantly.
High yield does not necessarily mean a profitable or high probability profitable trade.

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Derivatives Analysis