Advanced options strategy knowledge
Short Call Calendar Spread
Usage scenarios
When you expect the price of the target asset to rise sharply in the near future, and the forward price will fall back to the beginning of the position and fluctuate smoothly, you can use Short Call Calendar Spread.
How to build
Selling a short call calendar spread involves two options transactions:
Buy recent month's subscription options
Selling long-month subscription options
The target assets, exercise price, and quantity of the two options are the same.
Strategy brief
The underlying logic for using this strategy has two layers:
First, it is predicted that the target asset will rise rapidly in the near future, and they want to profit by buying recent monthly subscription options.
Second, it is expected that the target asset price will fall back and fluctuate smoothly after rapidly rising, thus compensating for the loss of time in recent months by selling the highly volatile premium for long-month options.
The ideal situation is that the price of the target asset rises rapidly. After the profit of the option has taken profit or expired in recent months, the price of the target asset falls steadily below the exercise price until the long-term option closes or expires.
Since the premium for recent month options at the same exercise price should be lower than that of long-month options, when this strategy is established, the book capital will show a net inflow.
When recent month options do not expire, it is possible to limit the risk associated with selling long-month options, thereby reducing the need for margin.
Based on the above two points, the strategy of selling a short call calendar spreads is a strategy with a lower cost of opening a position.
It is important to note that it is necessary to prepare a trading plan in advance after the options expire in recent months. According to different market conditions, you can choose to close long-term options or open other options at the same time to form a new options strategy.
This strategy is not a newbie-friendly strategy. In practice, using this strategy requires a very accurate judgment on the market and is suitable for investors experienced in options trading.
Risks and benefits
Maximum profit: When an option expires in recent months, if the stock price is far above or far below the exercise price, the maximum potential profit that will be obtained from selling a short call calendar spread is the net option premium received.
Maximum loss: If the recent monthly option is an off-price option when it expires, there is a risk of the biggest loss at this time. The long-month option is sold naked. Theoretically, the stock price can rise indefinitely, then the maximum loss is unlimited.
When both options are active, they need to be calculated on a case-by-case basis, since the maximum loss depends on the price of the option, which changes according to the level of volatility.
Break-even points: There are two break-even points, one above the exercise price and one below the exercise price. Since it also depends on the volatility of options, they need to be calculated according to actual conditions and are constantly changing.
