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Horizontal Call Time Spread - Introduction
The Horizontal Call Time Spread, also known as the Call Horizontal Time Spread, is a neutral options strategy that profits when the underlying stock remains stagnant or within a very tight price range. It is an options trading strategy that profits using the difference in time decay between long term options and short term options. Because there is a long term position in place, one Horizontal Call Time Spread can be rolled forward for multiple months unlike most other complex neutral options strategies that uses options of the same month and must re-establish positions on a monthly basis. Another advantage of the Horizontal Call Time Spread is that since longer term call options are bought with shorter term call options written against them, the position results in a net debit, allowing traders to put the position on without any margin requirement.
Types of Call Time Spreads
The Horizontal Call Time Spread is one of two types of time spreads that uses only call options. The other one being the Diagonal Call Time Spread which has a higher profitability if the underlying stock is expected to move higher moderately. Therefore, if the underlying stock is expected to remain largely stagnant and may move upwards moderately, the Diagonal Call Time Spread would better maximize your profitability than the Horizontal Call Time Spread.
Differences Between Horizontal Call Time Spread and Diagonal Call Time Spread
The Horizontal Call Time Spread has both a lower maximum profit potential and a narrower profitable range (the stock needs to stay within a narrower price range in order to stay profitable) than the Diagonal Call Time Spread. However, the Horizontal Call Time Spread has a much higher profit if the underlying stock remained totally stagnant, closing at the same price as when the position was first put on. Despite a much narrower profitable range and maximum profit range than the Diagonal Call Time Spread, the Horizontal Call Time Spread exceeds the profitability of a Diagonal Call Time Spread significantly when the underlying stock remains totally stagnant. As such, if you think a stock is going to stay extremely stagnant, the Horizontal Call Time Spread would be your options trading strategy of choice versus the Diagonal Call Time Spread.
When To Use Horizontal Call Time Spread?
Horizontal Call Time Spreads could be used when you wish to profit from a stock that is expected to stay stagnant or trade within a tight price range for the short term while keeping a long term call option position in place in case of future breakouts.
How To Use Horizontal Call Time Spread?
In a Horizontal Call Time Spread, At The Money (ATM) LEAPS call options are bought and then ATM near term calls are sold against the LEAPS call options.
Buy Long Term ATM Call + Sell Short Term ATM Call
Horizontal Call Time Spread 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.
Net Debit = $4.70 - $0.75 = $3.95
Trading Level Required For Horizontal Call Time Spread
A Level 3 options trading account that allows the execution of debit spreads is needed for the Horizontal Call Time Spread. Read more about Options Account Trading Levels.
Profit Potential of Horizontal Call Time Spread :
The Horizontal Horizontal Call Time Spread makes its maximum profit potential when the stock closes at the strike price of the short term call options upon expiration of the short term call options.
Profit Calculation of Horizontal Call Time Spread:
The value of a Horizontal 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.
Horizontal Call Time Spread Example
Assuming QQQQ closes at $45 upon expiration of the short term call options.
The 10 contracts of QQQQ Jan 2008 $45 Call options is now trading at $4.30.
The 10 contracts of QQQQ Jan 2007 $45 Call expired worthless.
Net Profit = $0.75 (total premium gained from the Jan 2007 $45 Call) - $0.40 (total premium lost on the Jan 2008 $45 call)
= $0.35 x 1000 = $350.
Risk / Reward of Horizontal Call Time Spread:
Upside Maximum Profit: Limited
Maximum Loss: Limited
(limited to net debit paid)
Horizontal Call Time Spread Breakeven Calculation:
The breakeven point of a Horizontal Call Time 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 Horizontal Call Time Spread:
Able to profit even if underlying asset stays stagnant.
Can be rolled forward for as many months as the expiration month of the long term call options.
Losses are limited to the net debit.
No Margin Needed.
Disadvantages Of Horizontal Call Time Spread:
Profits are limited.
Much narrower profitable range and lower maximum profit than the Diagonal Call Time Spread.
Alternate Actions for Horizontal Call Time 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 LEAPS Call Options to continue its profit run.
Questions About Horizontal Time Spreads
"How To Erase Margin Requirement In a Time Spread?"