What is a long calendar spread with calls?
A long calendar spread with calls is created when you sell a short-term call option and buy a longer-term call option at the same strike price. The goal is to profit from minimal price movement and time decay in the short-term call, while expecting volatility to increase later in the long-term call.
If the stock price stays at or below the short call before the front-month expiration, the strategy will be profitable. If the underlying stock price moves up beyond the back-month long call option, it would be ideal if volatility also increases. This will create a debit that is paid to enter the position, as the longer-dated options will be more valuable.
When to use a long calendar spread with calls strategy
When an investor thinks the stock price will be neutral or slightly bearish in the short term, a long calendar spread with calls becomes a viable strategy. This is a position that benefits from an increase in price and volatility after the short-term contract expires, and before the longer-dated contract is closed.
How to manage a long calendar spread with calls position
Traders want to see the underlying stock price to stay stable, but also want the implied volatility to increase after the front-month expiration. That will cause the back-month call price to increase, after the price of the front-month option declines due to time decay.
The front-month call option will naturally lose value faster than the back-month call option, all things being equal, because time decay accelerates as expiration nears.
Long calendar spread with calls maximum profit potential
The maximum profit from a long calendar spread with calls is limited to the amount received for selling the back-month call minus the cost of buying it back, minus the net debit paid to initiate the position. However, if the short call expires worthless and the underlying stock price and/or implied volatility increases, there is potential for unlimited profits.
Long calendar spread with calls maximum loss potential
You can only lose as much money as you paid to put the trade on.