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Long Calendar Spread with Calls Strategy

The Long Calendar Spread with Calls Strategy is established for a net debit where the profit potential and risk are limited. The maximum profit is realized if the stock price is equal to the strike price of the call. They are neutral, bullish, or moderately bearish depending on the relationship of the stock price to strike price when the position is established. If the stock price is at/near the strike price the position is established, and then the forecast is unchanged/neutral. If the stock price goes below the strike price when the position is established, the forecast must be a stock price to rise to the strike price at expiration.

The Long calendar spreads with calls are suitable for experienced traders who have the patience and trading discipline. Patience is required because of strategy profits from time decay, and stock price action. They can rise and fall around the strike price as expiration approaches. Here traders must have discipline in taking partial profits if possible in taking a small loss before it becomes big. A long calendar spread has low risk, also a neutral strategy that profits from the passage of time increase in implied volatility.

Breakeven

The break-even for a calendar spread is not calculated by different expiration cycles being used. The guideline used is within one strike of the calendar spread strike price. The level at which breakeven is a function of the underlying stock price, implied volatility, and rate of time decay. The breakeven is at the longer-term option expiration that occurs if the stock above the strike price by the amount of the premium paid.

Example

The long term call is expensive because of the time duration. The investor can offset some cost by entering into the spread. Selling one short-term and buying one long-term call by paying a premium of Rs 33.75. The Short-term call Rs 2440, then Long-term call Rs 2440 and Premium Paid Rs 33.75Here the Long-term cost without spread is Rs 70.50. The short-term call expires but the investor retains the premium. It will limit loss to Rs 33.75, which is lower than Rs 70.50, so the actual cost of the long-term call without the spread. Then the Market rises to 3000 and short-term calls have cost Rs 560. The spread value becomes zero. It will maximize the profit by purchasing long-term calls only. Here the market remains stable without movement. The spread expires as worthless, but the long-term call remains at the money. The Net profit from the spread will be ATM long-standing call minus the premium paid. So it will not make a loss, but income gets limited by market conditions.

Conclusion

Here to execute a long calendar spread with calls you expect a stock to trade high but move in the future after the short-term calls have expired.