While the “low” net cost to establish the strategy and the potentially “high” percentage profits are viewed as attractive features by some traders, calendar spreads require the stock price to be “near” the strike price as expiration approaches in order to realize a profit. If the stock price is above the strike price when the position is established, then the forecast must be for the stock price to fall to the strike price at expiration (modestly bearish).Ī long calendar spread with calls is the strategy of choice when the forecast is for stock price action near the strike price of the spread, because the strategy profits from time decay. If the stock price is below the strike price when the position is established, then the forecast must be for the stock price to rise to the strike price at expiration (modestly bullish). If the stock price is at or near the strike price when the position is established, then the forecast must be for unchanged, or neutral, price action. The forecast, therefore, can either be “neutral,” “modestly bullish,” or “modestly bearish,” depending on the relationship of the stock price to the strike price when the position is established. This value was calculated using a standard Black-Scholes options pricing formula with the following assumptions: 28 days to expiration, volatility of 30%, interest rate of 1% and no dividend.Ī long calendar spread with calls realizes its maximum profit if the stock price equals the strike price on the expiration date of the short call. *Profit or loss of the long call is based on its estimated value on the expiration date of the short call. Net Profit/(Loss) at Expiration of the 28-day Call Long 1 56-day 100 Call Profit/(Loss) at Expiration of the 28-day Call* Short 1 28-day 100 Call Profit/(Loss) at Expiration Stock Price at Expiration of the 28-day Call Profit/Loss diagram and table: Long calendar spread with calls However, since the time value of the long call depends on the level of volatility, it is impossible to know for sure what the breakeven stock prices will be. Also, conceptually, the breakeven points are 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. If the stock price rallies sharply so that both calls are deep in the money, then the prices of both calls approach parity for a net difference of zero.īreakeven stock price at expiration of the short callĬonceptually, there are two breakeven points, one above the strike price of the calendar spread and one below. For example, if the stock price falls sharply, then the price of both calls approach zero for a net difference of zero.
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If the stock price moves sharply away from the strike price, then the difference between the two calls approaches zero and the full amount paid for the spread is lost. The maximum risk of a long calendar spread with calls is equal to the cost of the spread including commissions.
It is impossible to know for sure what the maximum profit will be, because the maximum profit depends of the price of long call which can vary based on the level of volatility. Also, since the short call expires worthless when the stock price equals the strike price at expiration, the difference in price between the two calls is at its greatest. This is the point of maximum profit, because the long call has maximum time value when the stock price equals the strike price. The maximum profit is realized if the stock price equals the strike price of the calls on the expiration date of the short call. The maximum profit is realized if the stock price is equal to the strike price of the calls on the expiration date of the short call, and the maximum risk is realized if the stock price moves sharply away from the strike price. This strategy is established for a net debit (net cost), and both the profit potential and risk are limited. In the example a two-month (56 days to expiration) 100 Call is purchased and a one-month (28 days to expiration) 100 Call is sold.
A long calendar spread with calls is created by buying one “longer-term” call and selling one “shorter-term” call with the same strike price.
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