Tim Olson
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description, tags
| description | tags | ||||
|---|---|---|---|---|---|
| A horizontal spread buying a longer-dated ATM call at TTM T' and selling a shorter-dated ATM call at the same strike K with TTM T < T', profiting from time decay when stock stays near K. |
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Calendar Call Spread
Section: 2.18 | Asset Class: Options | Type: Income
Overview
The calendar call spread (horizontal spread) consists of a long position in a near-ATM call option with TTM T' and a short position in a call option with the same strike K but shorter TTM T < T'. This is a net debit trade. The trader's outlook is neutral to bullish. The best case at expiration of the short call (t = T) is if the stock price is right at the strike (S_T = K), maximizing the remaining value V of the long call.
Construction
- Buy 1 call option at strike K, TTM T' (longer expiry)
- Sell 1 call option at strike K, TTM T < T' (shorter expiry), same strike
Net debit: D
Payoff Profile
At t = T (expiry of short call), let V = value of the long call (expiring at T') assuming S_T = K:
- P_max = V - D (if S_T = K at short expiry)
- L_max = D (net debit paid)
If S_stop-loss <= S_T <= K, the trader can roll by writing another call with strike K and TTM T1 < T'.
Key Conditions / Signals
- Neutral to mildly bullish; expects stock to remain near K through T
- Low volatility environment after entry is ideal (long vega on net position)
- Best suited for income generation by repeatedly selling shorter-dated calls against the long call
Notes
This strategy resembles the covered call strategy in structure. While maintaining the long call, the trader can generate income by periodically selling call options with shorter maturities. The stop-loss price S_stop-loss defines the level below which the entire position is unwound.