Calendar call

Article contents



At a glance



Setting up the strategy


  1. Sell one near-term, out-of-the-money call option on the underlying stock.

  2. Buy one long-term, out-of-the-money call option on the same underlying stock.
Ideally you want the stock price to be below the strike price when the near-term call option expires, and above the strike price of the long-term call option at expiration.

Who should run this?


Intermediate to advanced traders.

Margin requirements


Learn more about Questrade’s option margin requirements.

Strategy overview



A calendar call is an options strategy in which a trader sells a call option with a near-term expiration, and simultaneously buys a longer-term call option that expires after the near-term option, each with identical strike prices.

Market outlook


  • Neutral

Strategy benefits


  • Can still profit if the stock price does not fluctuate too much before the near-term call option expiry.
  • Maximum loss is limited to the initial debit to enter into the strategy.
  • Becomes a less expensive long call strategy if the near-term call option expires worthless.

Strategy downsides


  • Profit is limited if the underlying stock price rises before the near-term call option expiry.
  • Losses can occur if the near-term call options are exercised when the stock rises.

Calendar call example



Scenario


ABC shares are currently trading at $28 in February, and you believe that they’ll rise moderately over the next five months. To set up the calendar call strategy, you:

  • Sell one March $32 call option for $10 (0.01 option premium x 1000 shares)
  • Buy one July $32 call option for $190(0.19 option premium x 1000 shares)
To enter into this strategy, you will be debited $180.

Note: in this example we are trading 10 option contracts (10 option contracts x 100 shares per contract = 1000 shares).

Possible results


  1. On the March expiration date, ABC shares go up two points and close at $30, meaning the March call option expires worthless. Five months later in July, ABC shares close at $38, meaning the July $32 call option finishes in the money. The call option’s intrinsic value would be $6000. Minus the initial debit of $180 to enter into this strategy, your total profit would be $5820. Once the near-term call option expires, this becomes a long call strategy and profit potential is unlimited.

  2. On the March expiration date, ABC shares close at $29. Again, the March call option would expire worthless. At the end of the July call expiry, the price remains stagnant and closes at $29.50, meaning it would also expire worthless. As a result, your total loss would be $180.

Profit and loss explained



Maximum profit


  • Maximum profit = long call intrinsic value x number of shares + option premium received – option premium paid

Maximum loss


  • Maximum loss = option premium paid

Break-even at expiration


  • Given the two expiration dates, there are too many variables in play to accurately predict the break-even point.

Sample calculations



  • Stock value at start of strategy: $28
  • To execute the strategy: Sell $32 call option for $10, Buy $32 call option for $190
  • Result: $180 net debit

Result 1 profit and loss


Stock price at expiration Profit and loss calculations 
$30 in March (near-term expiry) $0.01 (option premium per share)
x 1000 (10 option contracts comprised of 100 shares each)
= $10 profit


$38 in July
(long-term expiry)
$38 (stock price)
–$32 (strike price of long term call)
x 1000 (10 option contracts  comprised of 100 shares each)
+$10 (option premium received from near-term call option)
–$190 (option premium paid for long-term call option)
= $5820 profit



Result 2 profit and loss


Stock price at expiration Profit and loss calculations 
$29 in March (near-term expiry) $0.01 (option premium per share)
x 1000 (10 option contracts comprised of 1000 shares each)
= $10 profit


$29.50
(long-term expiry)
$0.19 (option premium per share)
x 1000 (10 option contracts comprised of 1000 shares each)
–$10 (option premium received from near-term call option)
= $180 loss



Note
: commission fees are not included in the above calculations.


Payoff diagram






Creating a calendar call







Standard order details

Order detail

Description

Symbol lookup field

Click  and change the mode to . Then enter the symbol you want to buy or sell. The default expiration date, strike price, and strategy appear. 




Tip: click the Option tab to view a more detailed option quote.

Modify the expiration date, strike price, and option strategy accordingly. For more information, see Elements of an option quote.
Action

The buy or sell action is set for you when you select the strategy type.

Qty

Select a value using the arrows , or enter a value manually.

Note: by default, the quantity will be populated with the value set in your user preferences.
Order type Select the type of order you want to submit. When creating strategy orders, only Limit or Market order types are available. For more information, see Order types.

The limit order type requires you to fill in additional fields. Refer to the table section below for details.
Duration

Select a duration to specify how long the order should remain active. For more information, see Order durations.

Route Select a route or leave the selection at Auto to let the platform determine the best one. Canadian routes will be listed for Canadian symbols and U.S. routes will be listed for U.S symbols.
Sub-route

This field will be filtered according to the route selection. It indicates where you prefer the order to be executed. Leave the selection at Auto to let the platform determine the best route.

Note: sub-route selection is only available for Canadian symbols.
Order type-specific details
Limit price Enter your limit price:

  • To have the price fluctuate according to real-time data, select . The icon changes to a lock icon , which locks the limit price. Once locked, use the refresh button to automatically update your limit price.
  • To choose a custom price, select .
Note: if real-time market data is not available, the limit price will be blank and the float limit icon will be unlocked.






Note: the video tutorial above shows how to create a calendar call strategy using IQ Edge; however, the principles are the same for IQ Web.
Tip: for an optimized viewing experience, watch the video on YouTube in full 720p HD. To open the video in YouTube, click the YouTube button in the bottom right corner of the video window and select the change settings icon to modify the video quality.


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