What is calendar spread?
Motive:
To earn profit from range bound Index price action near the strike price of the calendar spread with limited risk in any direction
To profit from a directional price move to the strike price of the calendar spread with limited risk if the market goes in opposite direction.
A long calendar spread with calls is created by buying one call of next expiry option and selling one call of near expiry option of index or stock.
Example,
Nifty trading as on 21-02-2019 at 10,790
Sell one lot of call option expiry on 28 feb @ 34 rs.
Buy one lot of call option expiry on 28 mar @ 156 rs.
Maximum profit:
Maximum profit is realized if nifty equal to strike price of the calls on the expiration date of the short call, it is maximum profit point as short call will expire worthless while next expiry call have time value maximum when nifty trading near strike price of 10900. While to decide the long call value is impossible as it depends on the level of volatility prevailing in the market.
Maximum risk:
The maximum risk of a long calendar spread with calls is equal to the cost of the spread including brokerage. If the nifty moves sharply away from strike price then both calls will approaches Zero and full amount paid for the spread is maximum loss, while in opposite side if nifty moves sharply up both call will becomes deep in the money, then the prices of both calls approach parity for the net difference of zero.
Here, Maximum loss in this position will be…..
Long call amount- short call amount
= 156 - 34 = 122 Rs.
Breakeven point:
There are two breakeven points
1) Either above strike price of 10900 in that case depends on prices on the expiration date of the short call at which the time value of the long call equals the original price of the calendar spread.
2) Below strike price of 10900 in that case again short call will expire zero but need to check Time value of long call while time value will depend on level of volatility.
Strategy Use:
A long calendar spread with calls realizes its maximum profit if the Index price equals the Index strike on the expiration date of the short call. The forecast can either be neutral, modestly bullish or modestly bearish, depending on the relationship of the Index price to the strike price when the position is established.
If the Index price is at or near the strike price when the position is established, then the forecast must be for unchanged, or neutral, price action.
If the Index price is below the strike price when the position is established, then the forecast must be for the Index price to rise to the strike price at expiration
If the Index price is above the strike price when the position is established, then the forecast must be for the Index price to fall to the strike price at expiration
It is safe strategy mostly used in weekly option of bank nifty and nifty where current expiry option being short and next weekly option is long mostly except major event like budget and election result pending. Simple reason to use this calendar spread strategy is to minimize risk of sudden gap up or gap down of index or stock. Generally, Theta value is more read in this link for more https://www.derivativelearn.com/search?updated-max=2019-02-12T09:31:00-08:00&max-results=7&start=7&by-date=false compare to next weekly option.
Happy reading
Derivativelearn
Motive:
To earn profit from range bound Index price action near the strike price of the calendar spread with limited risk in any direction
To profit from a directional price move to the strike price of the calendar spread with limited risk if the market goes in opposite direction.
A long calendar spread with calls is created by buying one call of next expiry option and selling one call of near expiry option of index or stock.
Example,
Nifty trading as on 21-02-2019 at 10,790
Sell one lot of call option expiry on 28 feb @ 34 rs.
Buy one lot of call option expiry on 28 mar @ 156 rs.
Maximum profit:
Maximum profit is realized if nifty equal to strike price of the calls on the expiration date of the short call, it is maximum profit point as short call will expire worthless while next expiry call have time value maximum when nifty trading near strike price of 10900. While to decide the long call value is impossible as it depends on the level of volatility prevailing in the market.
Maximum risk:
The maximum risk of a long calendar spread with calls is equal to the cost of the spread including brokerage. If the nifty moves sharply away from strike price then both calls will approaches Zero and full amount paid for the spread is maximum loss, while in opposite side if nifty moves sharply up both call will becomes deep in the money, then the prices of both calls approach parity for the net difference of zero.
Here, Maximum loss in this position will be…..
Long call amount- short call amount
= 156 - 34 = 122 Rs.
Breakeven point:
There are two breakeven points
1) Either above strike price of 10900 in that case depends on prices on the expiration date of the short call at which the time value of the long call equals the original price of the calendar spread.
2) Below strike price of 10900 in that case again short call will expire zero but need to check Time value of long call while time value will depend on level of volatility.
Strategy Use:
A long calendar spread with calls realizes its maximum profit if the Index price equals the Index strike on the expiration date of the short call. The forecast can either be neutral, modestly bullish or modestly bearish, depending on the relationship of the Index price to the strike price when the position is established.
If the Index price is at or near the strike price when the position is established, then the forecast must be for unchanged, or neutral, price action.
If the Index price is below the strike price when the position is established, then the forecast must be for the Index price to rise to the strike price at expiration
If the Index price is above the strike price when the position is established, then the forecast must be for the Index price to fall to the strike price at expiration
It is safe strategy mostly used in weekly option of bank nifty and nifty where current expiry option being short and next weekly option is long mostly except major event like budget and election result pending. Simple reason to use this calendar spread strategy is to minimize risk of sudden gap up or gap down of index or stock. Generally, Theta value is more read in this link for more https://www.derivativelearn.com/search?updated-max=2019-02-12T09:31:00-08:00&max-results=7&start=7&by-date=false compare to next weekly option.
Happy reading
Derivativelearn
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