In this blog post you are gonna know all about ” Long Calendar with calls option strategy”
A long call calendar spread option strategy consists of buying a call option with a later expiration date and selling a call option with an earlier expiration date, both with the same strike price. This strategy aims to make a net debit, meaning it spends money up front. Potential gains are limited, and so are risks.
The maximum profit is earned when the stock price equals the strike price of the call after the expiration of the short-term call. However, if the stock price moves significantly away from the strike price, maximum risk is realized. This strategy can range from neutral to slightly bullish in the long term and neutral to bearish in the short term.
IMPORTANT HIGHLIGHTS
- This option strategy aims to capitalize on gradual upward movements in the underlying index to benefit from time decay and potential increases in underlying volatility.
- The risk of this option strategy is limited to the initial debit paid to enter the trade. If the underlying index is below the strike price of the short call option after its expiration, the maximum loss is the debit paid.
- This strategy requires careful execution, ideally with option contracts that provide adequate liquidity.
Contents
Understanding of Long Calendar with Calls Option Strategy
A call calendar spread option strategy involves selling a short call option and buying a long call option with the same strike price but a different expiration date. The strategy aims to profit from minimal price movements and time decay in short-term call options, while profiting from rising volatility in long-term call options.
This works best if the stock price is below the short call until expiration, then exceeds the strike price of the long call, especially with increasing volatility. You pay a debit to enter the position because long-dated options are more expensive, with the initial cost being the maximum possible loss to the next month’s expiration.
Key Terms:
- Call Option: Gives the buyer the right to buy an asset at a set price within a specified date
- Long position: holding an option you bought.
- Short Position: Selling an option contract that you do not yet own
The calendar call option strategy is a neutral to bullish approach where you buy an at-the-money call option for next month’s expiration and sell an at-the-money call option for the current month’s expiration. It is also called a horizontal spread. This option strategy is a net debit, involves less risk, and is directionally neutral, aiming to profit from time decay and increasing underlying volatility.
When to run:
Place a calendar call option strategy when you expect the stock to rise steadily without significant spikes. It generates income by selling near-term options and collecting premiums against long-term options. This strategy works well with weekly options on indices due to good liquidity, although some stocks may have less liquidity in forward and far month contract.
Enter Pint: A call calendar spread option strategy involves two steps. First, you sell a short call option. Second, you buy a long call option at the same strike price but with a later expiration date.
Exit Point: Exiting a call calendar spread depends on whether the stock price is below the short call at expiration. If so, the short call becomes worthless, while the long call retains time value based on its remaining time and strike price. Time value works in contrast to long options, which decrease in value as the term expires.
Exiting involves a sell-to-close order, where the original debit minus the credit of selling the long option determines the gain or loss. If the stock price is above the short call at expiration, closing both options results in maximum losses. Closing only in-the-money short calls increases risk, but potential profits remain if the stock price rises. Exiting the spread involves more risk but offers higher profit potential.
Trade execution:
For an unbiased view, sell an at-the-money call for the current month and buy one for the next month. If you have a bullish or bearish view, adjust the calendar to out-of-the-money or in-the-money, respectively.
Time Decay
When using a call calendar spread strategy, time passing typically benefits the near-term option initially but becomes detrimental at expiration, reducing the value of the long call over time. Front-month short calls benefit from time decay, ideally out-of-the-money, while back-month long calls tend to increase in value near expiration, influencing the decision to exit the position.
Example
Lets understand this strategy deeply with the example of Nifty & Bank Nifty .
<–:-Nifty50-:–>
Here is the example for Nifty 50-
- Nifty 50 Index: 22,000
- Execution Date: March 14, 2024
Strategy Execution:
- Objective: We anticipate that the Nifty 50 index will continue to rise steadily over the coming months.
- Trade Execution:
- Buy: April 2024 Nifty 50 Call Option with a strike price of 22,000 (current at-the-money option).
- Sell: March 2024 Nifty 50 Call Option with a strike price of 22,000 (current at-the-money option).
Reasoning:
This strategy leverages the expected upward trend of the Nifty 50 index. By purchasing a longer-term call option while simultaneously selling a shorter-term call option with the same strike price, we aim to capitalize on both time decay and potential increases in implied volatility.
Risk Management:
The risk is limited to the initial debit paid to enter the trade. If the Nifty 50 index remains below 22,000 by the March 2024 expiration, the short call will expire worthless, and the maximum loss will be the debit paid. However, if the index rises above 22,000 by the April 2024 expiration, the long call option will start to generate profits, ideally with increasing volatility.
Execution Platform:
To execute this strategy, we would utilize a brokerage platform offering options trading on the Nifty 50 index, ensuring adequate liquidity for both the near-term and long-term options contracts.
Monitoring and Adjustments:
We will closely monitor the movement of the Nifty 50 index and any changes in implied volatility. If necessary, adjustments may be made, such as rolling the short call option to a higher strike or further expiration date, to manage risk and optimize potential returns.
[If you want to implement your option strategy, you may can use strategy builder software– Sensibull]
<–:-Bank Nifty-:–>
Example for Bank Nifty:
–Bank Nifty Index: 45,000
–Date of execution: March 14, 2024
Strategy Implementation:
Objective: We expect the Bank Nifty to experience a gradual upward movement in the coming months.
Trade execution:
Buy: April 2024 Bank Nifty call option with a strike price of 45,000 (currently at the money option).
Sell: March 2024 Bank Nifty call option with strike price 45,000 (currently at the money option).
Argument:
This option strategy exploits the expected upward trend of Bank Nifty. By simultaneously buying a long-term call option while selling a short-term call option with the same strike price, we aim to benefit from both time decay and a potential increase in underlying volatility.
Risk Management:
The risk is limited to the initial debit paid to enter the trade. If the Bank Nifty falls below 45,000 by expiry in March 2024, the short call period will be void and the maximum loss will be debit settlement. However, if Bank Nifty rises above 45,000 by April 2024 expiry, the long call option will start generating profits, ideally with rising volatility.
Execution Platform:
We will use a brokerage platform that will offer option trading on Bank Nifty, ensuring adequate liquidity for both near-term and long-term option contracts.
Monitoring and Adjustment:
Continuous monitoring of Bank Nifty movements and changes in underlying volatility is essential. Adjustments can be made, such as moving the short call option to a higher strike or further expiration date, to manage risk and optimize potential returns.
Conclusion
The long calendar call spread option strategy gives traders the opportunity to capitalize on anticipated market movements, especially in indices such as Nifty 50 or Bank Nifty. By simultaneously buying a long-term call option and selling a short-term call option with the same strike price, traders aim to profit from both time decay and a potential increase in underlying volatility.
This strategy is suitable for neutral to bullish market outlook and can be implemented with proper risk management strategy. Continuous monitoring and potential adjustments are essential to maximize returns and effectively manage risk. Overall, the Long Calendar Call Spread Strategy provides a versatile approach for traders looking to generate income and reduce risk in the options market.
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