Skip to content

Neutral Calendar Spread-Neutral Strategy

Options-Trading-Beginners

Explanation

A Long Call Calendar Spread is a strategy to gain from Theta with limited risk. The neutral calendar spread strategy is implemented if the trader is neutral in the near future and bullish for the long term (2 months or so). It involves writing of near month 1 ATM Call Option and buying 1 Mid-Month ATM Call Option with the same strike price and of the same underlying asset. This strategy is executed for a net cost, and both the profit potential and risk are limited.

Long calendar spreads are similar to short straddles and short strangles, but difference stands in initial investment, risk and profit potential.

Risk:

Maximum risk potential for this option strategy is limited to the initial investment made for implementing strategy.

Reward:

The maximum profit is realized if the stock price is equal to the strike price of the calls on the expiration date of the short call.

Construction:

Sell 1 Near-Month ATM Call Option

Buy 1 Mid-Month ATM Call Option

 

Payoff Chart

Neutral-Calendar-Spread-Payoff-Chart

Example

A trader sees a range bound market in near month time frame but sees volatility in market in mid-month time. He implemented a calendar spread option strategy where he shorted near month ATM 17100 call option and received premium of Rs. 264, bought another mid-month 17100 call option at a premium of Rs. 389. Net initial fund outflow is equal to Rs 6700 (389 – 264) *50.

    Open FREE Acccount with us

     

    Scenario1:
    If the near-monthexpiryofindexclosesat17000 or at the short strike price call option, the the trader will get to keep the premium received amounti.e.Rs.13200.(264*50).And if Mid-Month Nifty expire at16950,thenthe trader will make aloss on long term contract.

    Scenario2:
    If the near month contract strike price rises above the call option. The short position will start to make contract.

    The mid-month call strike price can variate according to the market conditions. If the mid term call rises tit will result in gains other wise losses

    No comment yet, add your voice below!


    Add a Comment

    Your email address will not be published. Required fields are marked *

    F & O

      20

      Per order + Get Instant Pledge Benefits* + Zero delivery Brokerage

      10

      Per order only (No hidden charges)

      Open FREE Demat Account in less than 10 minutes (Commodity & Currency)

      20

      Per order + Get Instant Pledge Benefits* + Zero delivery Brokerage

      10

      Per order only (No hidden charges)

      Open FREE Demat Account in less than 10 minutes

      20

      Per order + Get Instant Pledge Benefits* + Zero delivery Brokerage

      10

      Per order only (No hidden charges)

      Related Posts

      Bullish Trend Reversal Candlestick Patterns
      Earning a profit in the bullish market is easier, as you can buy any stock...
      Identify Trend in Stock Market
      Derivatives or Future & Options (F&O) segment accounts major volume of trades in the stock...
      Options-Trading-Beginners
      Explanation Reverse iron condors are market neutral strategy with no directional bias. For this strategy...