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The Calendar Call Spread, being one of the three popular forms of Calendar Spreads (the other 2 being the Calendar Put Spread and the Ratio Calendar Spread), is a neutral options strategy that profits when the underlying stock remains stagnant or trades within a tight price range.
A Calendar Call Spread profits primarily from the difference in rate of premium decay between the near term short options and the long term LEAPs.
This is possible as near term option premiums decay faster than long term option premiums.
Because the Calendar Call Spread buys LEAPS which are more expensive than the short term options sold, this strategy results in a net debit and is therefore a form of Debit Spread.
There are 2 ways to establish a Calendar Call Spread. One way is to buy and write options of different expiration months and different strike prices. In this case, it is classified as a Diagonal Spread.
The other way is to buy and write options of different expiration months but at the same strike price. In this case, it is classified as a
Horizontal Spread. We will be exploring both versions of
the Calendar Call Spread here. I call them the Diagonal Calendar Call Spread and the Horizontal Calendar Call Spread.
(These classifications are only for a deeper understanding of the kinds of option spread strategies and is not necessary for the execution of these strategies.)
When To Use Calendar Call Spread?
One should use a Calendar Call Spread when one wishes to profit from an underlying asset that is expected to stay stagnant or within a tight price range and also wishes to keep a long term call position for if the stock breaks out in future.
How To Use Calendar Call Spread?
Diagonal Calendar Call Spread
In this version of the Calendar Call Spread, all you have to do is to purchase an In the Money (ITM) LEAP and then sell At the Money (ATM) or Out of the Money (OTM) near term calls against the LEAP.
Example : Assuming QQQQ trading at $45 now. Buy To Open 10 contracts of QQQQ Jan 2008 $44 Call options at $5.70.
Sell To Open 10 contracts of QQQQ Jan 2007 $45 Call at $0.75.
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Read the full tutorial on Diagonal Calendar Call Spread.
Horizontal Calendar Call Spread
In this version of the Calendar Call Spread, you will purchase At The Money (ATM) LEAP call options and then sell ATM near term calls against the LEAP call options.
Example : Assuming QQQQ trading at $45 now. Buy To Open 10 contracts of QQQQ Jan 2008 $45 Call options at $4.70.
Sell To Open 10 contracts of QQQQ Jan 2007 $45 Call at $0.75.
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Read the full tutorial on Horizontal Calendar Call Spread.
Trading Level Required For Calendar Call Spread
A Level 3 options trading account that allows the execution of debit spreads is needed for the Calendar Call Spread. Read more about Options Account Trading Levels.
Profit Potential of Calendar Call Spread :
Both the Horizontal Calendar Call Spread and Diagonal Calendar Call Spread reaches their maximum profit when the underlying stock closes at the strike price of the short call options during expiration of the short call options.
Profit Calculation of Calendar Call Spread:
The value of a Call Time Spread during expiration of the short call options can only be arrived at using an options pricing model such as the Black-Scholes Model because the expiration value of the long term call options can only be arrived at using such a model.
Risk / Reward of Calendar Call Spread:
Upside Maximum Profit: Limited
Maximum Loss: Limited
(limited to net debit paid)
Break Even Point of Calendar Call Spread:
The breakeven point of a Calendar Call Spread is the point below which the position will start to lose money if the underlying stock rises or falls strongly and can only be calculated using the Black-Scholes model.
Advantages Of Calendar Call Spread:
Able to profit even if underlying asset stays stagnant.
Buying the LEAP in lieu of the stock can generally allow the underlying asset to be controlled at a discount for the long term.
Losses are limited to the net debit.
Disadvantages Of Calendar Call Spread:
Profits are limited even if the underlying asset rallies.
Losses can be sustained if the short call options are assigned when the underlying asset rallies.
Adjustments for Calendar Call Spreads Before Expiration :
1. If you wish to profit from a rally in the underlying asset, you could buy back
the short call options before it expires and allow the LEAP Call Options to continue its profit run.
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