37 lines
1.4 KiB
Plaintext
37 lines
1.4 KiB
Plaintext
Calendar Spreads
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A calendar spread, also frequently called a time spread, involves the sale of one
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option and the simultaneous purchase of a more distant option, both with the same
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striking price. In the broad definition, the calendar spread is a horizontal spread. The
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neutral philosophy for using calendar spreads is that time will erode the value of the
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near-term option at a faster rate than it will the far-term option. If this happens, the
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spread will widen and a profit may result at near-term expiration. With call options,
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one may construct a more aggressive, bullish calendar spread. Both types of spreads
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are discussed.
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Example: The following prices exist sometime in late January:
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XYZ:50
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April 50 Call
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(3-month call)
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5
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July 50 Call
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(6-month call)
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8
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October 50 Call
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(9-month call)
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10
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If one sells the April 50 call and buys the July 50 at the same time, he will pay a debit
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of 3 points - the difference in the call prices plus commissions. That is, his invest
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ment is the net debit of the spread plus commissions. Furthermore, suppose that in 3
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months, at April expiration, XYZ is unchanged at 50. Then the 3-month call should
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be worth 5 points, and the 6-month call should be worth 8 points, as they were pre
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viously, all other factors being equal.
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XYZ:50
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April 50 Call
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(Expiring)
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0
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July 50 Call
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(3-month call)
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5
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October 50 Call
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(6-month call)
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8
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