The Out of
the Money Calendar Call is a low risk, high reward option strategy if
you expect bullish stock price movement.
option-info and options-graphs sites:
Horizontal Spread, Time Spread
Outlook: Bullish on stock price movement, and Implied Volatility
currently low or normal. The expectation is that gains will be made from
the passage of time as well as a rise in the stock price.
Sell call(s) using the next strike price above the current stock
price, and a near term expiration date, and buy call(s) using the same
strike price and an expiration date further out in time.
when: Stock moves higher, while near term short calls lose value
due to the passage of time.
Gain: Must use an options calculator or graphing software. Usually
more than the initial debit.
when: Stock does rise higher than the lower breakeven point, or rises
beyond the upper breakeven point, or before expiration if volatility falls
Loss : Limited to the initial debit.
Calculation: There are two breakeven points, above and below the
OTM strike. An options calculator or graphing software is necessary to
calculate because the breakevens depend on the volatility.
compared to stock: Increased leverage, much less capital required,
"built-in" stop loss.
compared to stock: Greater risk of 100% loss of the capital invested,
no dividends, limited life.
after entry, increasing implied volatility is positive.
after entry, the passage of time is positive IF the stock moves higher,
but not over the short strike.
Requirement : None. Initial debit must be paid in full.
Calendar Call, ATM; Calendar Call ITM.
Equivalent: No true synthetic, but a Calendar Put using same strikes
and expiration dates is a nearly identical position.
- An OTM
Calendar Call can be used instead of positioning bullishly with stock,
ATM long calls, OTM long calls, or ATM Bull
to stock, the strategy has much less risk and more leverage.
to ATM long calls and ATM Bull Calls, the initial debit is less,
which means the breakeven point is lower.
to OTM long calls, much less stock movement is needed for a gain.
The OTM Calendar has it's maximum gain where the OTM long call would
still not be at breakeven.
compared to either type of call by itself, the passage of time helps
the Calendar, IF the stock rises.
the OTM Calendar Call has a "sweet spot", and if the stock
rises too much the position will be hurt. This is not the case for
any of the other positions.
- The upper
and lower breakeven points of a Calendar Call are determined by the
volatility of the stock. A stock with higher volatility will have a
wider range of profitability. However, buying a Calendar Call when the
stock is at historically high volatility is a bad idea. The volatility
returning to normal levels can easily overcome the gains from both the
stock price rising, and the passage of time.
variations of Calendar Calls can be used if you have a near term neutral
or bearish opinion on a stock or ETF, and want to target a "sweet
spot" at or lower than the current price. See Calendar Call, ATM
for a neutral strategy, and Calendar Call, ITM for a bearish strategy.
this is a bullish position, the trader is expecting the stock to rise.
If the stock does not rise, it is usually wise to exit the trade, taking
less than the maximum possible loss. Using the graph at the top of the
page, you might exit if the stock dropped to about 48 within two weeks,
and your loss would be about half the maximum possible.
- Many Calendar
Call traders with a gain try to be out of the trade with a week left
to expiration. See the Delta
Neutral Trading page for reasons why.
- Over the
long term, successful Calendar Call traders try to beat the market by
having many small gains, and fewer small losses. They do not usually
take the maximum loss nor try to squeeze every penny out of the winners.
- If the
stock stays near or moves near one of the breakeven points, it is possible
to adjust a Calendar Call into a "Double Calendar" by buying
another Calendar Call at a higher or lower strike price, whichever way
the stock is moving. This will give a higher overall breakeven point
if the stock is moving up, or lower if the stock is moving down. However,
this is not a guaranteed fix: the stock could whipsaw.