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How to Trade Options » OPTION SPREAD TRADING » Call Calendar Spread Example

Call Calendar Spread Example

In this hypothetical example, we’re looking at trading options on the QQQ in an imaginary situation where we believe that it will continue to rise over the next few months.

So with the QQQ trading at $106 we decide to sell (short) the nearest OTM options at $107 expiring in 20 days, while at the same time, purchasing $107 call options expiring in 50 days. The total cost is $0.69 per spread position and since we’ve taken 10 positions, the total debit is $690 plus commissions.

Now take a look at the image below, where we’ve analyzed the risk graph.

call calendar spread

You’ll notice that if the QQQ doesn’t rise above $108.78 before the near month expiration date, then a profit will be realized if both positions are closed simultaneously. But if the QQQ’s fall below $105.24 we begin to realize a loss, which falls away up until a maximum of the $690 cost of the debit spread. So this is definitely a calendar spread with a bullish outlook.

The maximum profit of $711 is realized if the underlying is sitting at the option strike price of $107 at expiration date.

Things to Look Out For

Before entering a call calendar spread position, make sure you check that there is not too much of a discrepancy between the option implied volatilty of the near term options compared to the longer term ones. If the longer term options are too over-priced, the deal may not be as sweet as you imagine.

Since this position is a debit spread, there will be no margin requirement with your broker. Margin requirements only come with positions where you receive a net credit upon entry.

Experiment With Strike Prices

In the second example below, we have taken a different approach. Instead of using $107 calls, we have chosen to go for $109 call options, which are further out of the money. So now our risk graph looks different – and our risk to reward ratio has also changed.

call calendar spread

This time, our position has only cost us $460 instead of $690, so that is our total risk. Our maximum profit on the other hand, has risen to $849, which is almost double our maximum risk. However, we need to believe more strongly that the price of the QQQ will rise in the near term because, unlike the $107 calendar position, there is no room for a fall in price before we start losing money.

Our upper level breakeven point however, has risen to $111.40.

Consequently, the further out of the money your call options are, the more it approximates a simple long call option position with a later expiration date, except that the entry price is reduced and the upside profit potential is also capped. This sounds like a bull call spread, except that if the price rises too much, too quickly, you begin to see a loss.

 

 

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DISCLAIMER: All stock options trading and technical analysis information on this website is for educational purposes only. While it is believed to be accurate, it should not be considered solely reliable for use in making actual investment decisions. This is neither a solicitation nor an offer to Buy/Sell futures or options. Futures and options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this video or on this website. Please read "Characteristics and Risks of Standardized Options" before investing in options. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.