228 Part II: Call Option Strategies 
that was described earlier in this chapter. Furthermore, assume that the deltas of the 
calls in question are .25 for the July and .15 for the April. Given that information, one 
can compute the neutral ratio to be 1.667 to 1 (.25/.15). That is, one would sell 1.667 
calls for each one he bought; restated, he would sell 5 for each 3 bought. 
This out-of-the-money neutral calendar is typical. One normally sells more calls 
than he buys to establish a neutral calendar when the calls are out-of-the-money. The 
ramifications of this strategy have already been described in this chapter. Follow-up 
strategy is slightly different, though, and is described later. 
THE IN-THE-MONEY CALENDAR SPREAD 
When the calls are in-the-money, the neutral spread has a distinctly different look. 
An example will help in describing the situation. 
Example: XYZ is trading at 49, and one wants to establish a neutral calendar spread 
using the July 45 and April 45 calls. The deltas of these in-the-money calls are .8 for 
the April and .7 for the July. Note that for in-the-rrwney calls, a shorter-term call has 
a higher delta than a longer-term call. 
The neutral ratio for this in-the-money spread would be .875 to 1 (.7/.8). This 
means that .875 calls would be sold for each one bought; restated, 7 calls would be 
sold and 8 bought. Thus, the spreader is buying more calls than he is selling when 
establishing an in-the-money neutral calendar. In some sense, one is establishing 
some "regular'' calendar spreads (seven of them, in this example) and simultaneous­
ly buying a few extra long calls to go along with them ( one extra long call, in this 
example). 
This type of position can be quite attractive. First of all, there is no risk to the 
upside as there is with the out-of-the-money calendar; the in-the-money calendar 
would make money, because there are extra long calls in the position. Thus, if there 
were to be a large gap to the upside in XYZ perhaps caused by a takeover attempt 
- the in-the-money calendar would make money. If, on the other hand, XYZ stays in 
the same area, then the regular calendar spread portion of the strategy will make 
money. Even though the extra call would probably lose some time value premium in 
that event, the other seven spreads would make a large enough profit to easily com­
pensate for the loss on the one long call. The least desirable result would be for XYZ 
to drop precipitously. However, in that case, the loss is limited to the amount of the 
initial debit of the spread. Even in the case of XYZ dropping, though, follow-up 
action can be taken. There are no naked calls to margin with this strategy, making it 
attractive to many smaller investors. In the above example, one would need to pay for 
the entire debit of the position, but there would be no further requirements.