26 lines
1.9 KiB
Plaintext
26 lines
1.9 KiB
Plaintext
Chapter 9: Calendar Spreads 199
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If the underlying stock moves substantially up or down in the first 3 months, the
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spreader could realize a larger dollar loss with the October/ April spread because his
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loss will approach the initial debit.
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The remaining combination of the expiration series is to initially buy the
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longest-term call and sell the intermediate-term call against it. This combination will
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generally require the smallest initial debit, but there is not much profit potential in
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the spread until the intermediate-term expiration date draws near. Thus, there is a
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lot of time for the underlying stock to move some distance away from the initial strik
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ing price. For this reason, this is generally an inferior approach to calendar spread
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ing.
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SUMMARY
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Calendar spreading is a low-dollar-cost strategy that is a nonaggressive approach, pro
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vided that the spreader does not invest a large percentage of his trading capital in the
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strategy, and provided that he does not attempt to "leg" into or out of the spreads.
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The neutral calendar spread is one in which the strategist is mainly selling time; he
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is attempting to capitalize on the known fact that the near-term call will lose time pre
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mium more rapidly than will a longer-term call. A more aggressive approach is the
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bullish calendar spread, in which the speculator is essentially trying to reduce the net
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cost of a longer-term call by the amount of credits taken in from the sale of a nearer
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term call. This bullish strategy requires that the near-term call expire worthless and
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then that the underlying stock rise in price. In either strategy, the most common
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approach is to sell the nearest-term call and buy the intermediate-term call.
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However, it may sometimes prove advantageous to sell the near-term and buy the
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longest-term initially, with the intention of letting the near-term expire and then pos
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sibly writing against the longer-term call a second time. |