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Calendar Call Option Strategy

Calendar Call Option Strategy

What is Calendar Call Option Strategy?

  • Calendar Call Option Strategy is a neutral to bullish Strategy wherein you buy ATM call next month expiry and sell ATM current month expiry. Calendar Call is also known as horizontal Spread. This Strategy is net debit, low risk, directional neutral strategy that generates profit from the pass of time and an increase in Implied volatility.

When to Execute?

  • Calendar Call needs to be executed when you expect stock to rise steadily and not too far too fast. The objective is to generate income against long term options by selling near term options and gaining premium. Good to execute on Indices weekly options because of good liquidity, Next and far month contracts of few stocks are sometimes less liquid.

What is the Trade?

  • If we have the neutral view, we can sell ATM Call of current month expiry, buy the next month ATM Call. In Addition to this, if we have a bullish or bearish view, we can shift the calendar to OTM or ITM respectively.

What will be maximum profit?

  • Calendar call’s maximum profit is realised when stock price closes exactly at sold strike price on the expiry. Because long calls will have the maximum time value and sold calls will expiry worth less. Calendar call will be in profit if underlying stays between the breakeven point on expiry.

What will be maximum loss?

  • Maximum risk on the trade itself is limited to the net debit of the bought calls minus the sold calls.

What are the advantages?

  • Generate monthly income. Can profit from range bound stocks and make a higher yield than with a Covered Call.

What are the disadvantages?

  • Capped upside if the stock rises. . Can lose on the upside if the stock rises significantly. High yield does not necessarily mean a profitable or high probability profitable trade.

Example of Calendar Call:

  • Suppose Nifty is Trade 15800. Weekly Calendar Call Nifty future price is 15800. Calendar call can be executed by selling CE current Weekly Expiry 15800 CE @ 140 and Buying Next Week expiry 15800 CE @ 190. Max Profit will be earned market stays around 15800.00