Calendar Call Spread – A Simple Neutral Trading Strategy

Calendar Call Spread is an simple Options Trading Strategy can be used by beginners. This strategy is mainly used in neutral market conditions.

Know everything about Calendar Call Options Strategy here.

About Calendar Call Spread

The Calendar Call Spread is a neutral trading strategy that involves buying and selling of call options.

This includes buying a long term call option and simultaneously selling a short term call option by offering the same strike price.

We use it to make profits when there is little or no movement in the price of the security.  The losses in this strategy are in sync with the upfront cost.

Thus, the beginners could use it if they have a good idea about the effect of the amount of time left until expiration on the prices of options contracts.

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When to use Calendar Call Spread Strategy?

The Calendar call spread can be used for obtaining profits when there is less movement in the security of a price. We can use it in neutral conditions and a strong possibility of the specific security to pass a period of stability.

There are maximum chances of experiencing the losses depending on the amount spent on establishing the spread.

Also, there is no risk of getting any extra losses in the drastic movement of a security in either direction. Hence, we could use this strategy safely, even if the traders have any security concerns.

Using a Calendar Call Spread Strategy

It is quite easy to learn the setting up of the Calendar Call Spread. The trader has to write calls based on the relevant security with a near term expiration.

The trader also has to ensure that he purchases the same amount based on the same security. He should also focus on the same strike with a longer expiration date.

There will be more expenditure on the longer-term options as they have a higher time value. It makes it a debit spread with an upfront cost during establishment.

Both transactions have to be coordinated and carried out at the same time. At the same time, the trader can choose to use legging techniques as per preferences.

Since the options are chosen with the same strike, it is considered to be a horizontal spread. The strategy works by using the money options.

A small deviation from this can be made with a higher strike to reduce the spread’s cost if preferred.

Example on Calendar Call Spread

A hypothetical situation is explained as a means of providing an example for creating Calendar Call Spread. A hypothetical company, X, is chosen for this.

The Company X stock trades at Rs 3500. It is predicted that this price will remain stable for the short term.

The money calls with a year term expiration are trading at Rs 140, consisting of 100 of these options written at a credit of Rs 14000. It can be considered to be Leg A.

Money calls with a longer-term expiration are trading at Rs 280. The trader buys one contract consisting of 100 of these options for Rs 28000.

It could be Leg B. This creates a Calendar Call Spread at a net cost of Rs 14000.

Find out other Neutral Option Trading Strategy here

Objectives of Calendar Call Spread

We could use the Calendar Call spread in a collection of situations.

The main aim of using this strategy would be to benefit from the possible differences in volatility and time decay and reduce the effect of any movements that could be seen in the underlying security.

We expect the underlying stock of Long Call Calendar Spread to be at or nearest to strike price at the expiration date. This is the maximum advantage we can summon from the near time decay.

Potential for Profit and Risk Of Loss

Various precise calculations are available for understanding the exact potential profit of options trading strategies, which depend on the movement of the price of the underlying security.

But we cannot do it with Calendar Call Spread as the profits depend on the effect of time decay in the price of the options involved.

We could use the Pricing model like the Black Scholes for prediction in this case. However, it does not provide complete accuracy.

The principle of the profit generation of this strategy is quite precise. The near term options will lose their time value quicker than the long term ones. Thus, the near-term contract written by a trader should fall in price faster than the contracts owned by them.

According to this principle, considering that the underlying security price has not moved before the expiration, the trader can buy the options written back. In such a case, the trader will sell the options owned and thus, make profits.

Another option would be to let the options written to expire without any worth. For this, considering the sample situation, the initial stock price of Company X is at Rs 3500 by the time the options present in Leg A expires.

This causes them to expire as worthless. The longer-term options the trader buys in Leg B are still at the money. At the same time, they must have retained the majority of the time value that they had.

Example of Calendar Call Spread Options Strategy

If it is the case, for example that the options in Leg B were trading for Rs 175 per option, the trader will be able to sell it for Rs 17500.

With this, the trader can profit from Rs 3500 from the initial investment of Rs 14000. If there are higher prices provided for the options bought in Leg B, then the profits will move higher.

Considering that the options in Leg A expire being worthless, the profits come by “Total Value of Options Bought in Leg B: Initial Net Investment.”

If there are high values of the underlying security, then we assign Leg A, providing liability. But then, the order could exchange the options bought in Leg B to buy the underlying security for the price at which it should be sold at. Then, the losses would rely on the initial cost that must have been required to establish the spread.

If there is a downfall in the price of the underlying security, the options of Leg A would be worthless on expiring, which leaves out liabilities.

Then, the price of the options bought in Leg B would be based on the margin of fall of the underlying security price. The trader might lose some money in this case.

However, at the same time, he could sell the options owned to regain a little amount of money. It can help reduce the losses experienced.

The absolute maximum losses experiment will be the net expense amount on establishing the spread.

Find out more relevant Neutral Option Trading Strategy below

Tips for Successful Trading

We have several tips for engaging in successful trading with the Calendar Call Spread Strategy. The trader should have a definite plan on how to manage risks.

They should be able to understand the positions surrounding maximum loss and plan accordingly.

If there are chances of falling out of the predicted situation, enough steps should be taken to reduce the losses.

The trader should pick the expiration months as though for a covered call. This becomes a wise decision as the investor will not own the underlying stock but, at the same time, will have the right to buy the stock.

If traders choose to own a call or put against a stick, they can see an option against this and another leg into any of the Calendar Spread options at any point in time.

Alternatives to this Neutral Trading Strategy

We can replicate the Calendar call by using puts instead of calls giving the Calendar Put Spread. Also, one can choose to make a diagonal spread instead of a horizontal one.

We can do it by buying calls with a lower strike than the one written. Here, the primary idea is the same, but it would be more costly to consider along with more profits if the underlying security price might increase even with a small margin.

Calendar Call Spread – Conclusion

The Calendar Call Spread is a great strategy that we could consider as a beginner if they can profit from a stable condition of underlying secure in price along with reducing losses if the price fluctuates in either direction.

The idea of using the strangely is quite simple. The main principle is to try and make profits from the effects of time decay.

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