A long calendar spread with calls is an options strategy used to profit from neutral price action near its strike prices and has limited upside and downside risk. You can create the long calendar spread with calls by purchasing a long-term call and selling a short-term call that both have the same strike price. The strategy has a net cost when set up. Both its risk and its profit potential are limited. The maximum gain is when the price of the stock equals the strike price on the day that the short-term call expires. The risk in this trade is that the stock price moves far from the strike price. Thus, you will use this strategy in a quiet market.
What Is a Call Calendar Spread?
This type of options strategy has time value but no intrinsic value. You will sell a call option at a month, for example. And, for example, you will buy a call at the same strike price for the same stock at two months. You will typically set this up with at-the-money calls but you can go for higher profit by choosing out-of-the-money calls. What you are doing is estimating what the value of your long-term call will be at expiration of the short-term call. If you were wrong about the stock not trading far from its current range, your time value goes away along with any potential profits.
Maximum Profit From a Long Calendar Spread With Calls
Your top profit this strategy is when the market price of the stock is exactly the same as the strike price when the short-term option expires. At this time the call you sold expires worthless and the call that you purchased at maximum “time value.” You will exit the long-term contract and pocket your money which is the maximum difference between the prices of the contracts. What that profit will be is hard to predict as it is affected by the then-current level of market volatility.
Maximum Risk From a Long Calendar Spread With Calls
The maximum risk of this strategy is the cost difference between your purchased call and sold call minus fees and commissions. This happens when the price of the stock moves far from the strike price of the contracts. This brings the prices of the contracts close to the same price or to the same price. If the market price rises far above your strike price, the contracts will be priced the same and if the stock falls precipitously, the contracts will both be worthless.
There are always break-even points for this trade. However, because of potentially high volatility, determining where these break-even points are is purely guesswork.
When to Use a Long Calendar Spread With Calls and When to Get Out
Because this trade is profitable only when the stock price ends up at the strike price, you will use this trade when your market forecast is neutral and no more than modestly bearish or bullish. This is also a trade that you need to pay attention to. The stock may be sitting close to the strike price and you may be anticipating your profit. Then, something happens that drives the stock price up or down and your profit begins to disintegrate. If you see this happening, you can get out of the trade and salvage at least part of your maximum profit but you need to be paying attention!
Because this is a strategy with limited profit and depends on an accurate market forecast, you need to learn when to set up this trade, how to set it up, and when to get out. Learning from the pros at Top Gun Options is your best bet for reliable success with a long calendar spread with calls.