Long Call Calendar Spread
Strategy motivation
When you expect the underlying asset's price to remain relatively stable in the short term but rise in the future, consider using the long call calendar spread strategy.
Construction of the strategy
To construct this strategy, sell near-term calls with a closer expiration date while buying an equal number of longer-term calls with the same strike price but a longer-term expiration date.
Brief description
The best-case scenario for the long call calendar spread strategy is to choose the strike price of a near-term expiration option close to the underlying asset's price. However, this requires very accurate judgment.
When selecting the strike price for the long call calendar spread strategy, you can use the following straightforward guidelines: choose at-the-money options in a stable market, out-of-the-money options in a bullish market, and in-the-money options in a bearish market.
After establishing this strategy, if the underlying asset's price does not change much in the near term, you can profit from the short call as it decreases in value.
When the near-term call expires, you can sell the longer-term call or open other options positions to form a new strategy, depending on the market situation.
Suppose you choose to continue holding the longer-term call. In that case, there is still an opportunity to benefit from the potential rise of the underlying asset.
Of course, if the underlying asset's price falls afterward, losses might also be incurred.
Since the premium of the near-term call with the same strike price as the longer-term call should be lower, this strategy is established for a net debit.
Gain & Loss
Breakeven
The long call calendar spread has two breakeven points, one above and one below the strike price. These breakeven points represent the stock prices on the expiration date of the short call at which the time value of the long call equals the original price of the calendar spread.
However, the exact values of these breakeven stock prices are impossible to predict with certainty, since the time value of the long call depends on the level of volatility in the market.
Maximum gain
The potential maximum profit of a long call calendar spread occurs when the stock price is equal to the strike price of the short call on the expiration date.
At this point, the long call has its maximum time value, and the short call expires worthless.
The exact amount of potential profit depends on the price of the long call, which can vary based on market volatility.
Maximum loss
The potential maximum risk of a long call calendar spread is equal to the cost of the spread if the stock price moves significantly away from the strike price.
This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. Read more
