Long Call Calendar Spread
Outlook: Expecting minimal price movement; possible bullish skew

The long call calendar spread is engineered to allow you to profit from fluctuations in time value. A so-called horizontal spread, the trade involves the sale of a shorter-term call and the simultaneous purchase of a longer-term call, with both options sharing the same strike price. Both trades are closed out just prior to the expiration of the shorter-term option, allowing the trader to capture the remaining time value on the longer-dated call.

Since the impact of time value is greatest when dealing with at-the-money options, the stock will ideally remain very close to the strike price of your calls throughout the duration of the trade. In other words, this strategy is best reserved for relatively stagnant equities.

To understand how the long call calendar spread allows you to capture time value, let's look at an example.

Entering the Trade

Stock XYZ has been churning around $90 per share for weeks. With no major events on the calendar, and the broader equities market relatively calm, it seems unlikely the stock will make a big move anytime soon. You decide to construct a long call calendar spread by selling to open the front-month 90-strike call for the bid price of 0.91, and simultaneously buying to open the back-month 90-strike call for the ask price of 1.43.

After subtracting your credit of 0.91 from your debit of 1.43, you've entered the spread at an initial cost of 0.52. Multiplied by 100 shares per contract, you've spent $52 to enter the calendar spread.

Potential Gains

In the best-case scenario, Stock XYZ will be trading squarely at the strike price of your call options when the front-month contract is due to expire. With the shares right at $90, you can let your front-month option expire, and simultaneously sell to close the longer-term call for 1.15. In other words, you're exiting the spread with a net credit of 0.63 (credit of 1.15 - initial net debit of 0.52). Accounting for 100 shares per contract, you'll collect $63 for unwinding the spread.

As you can see, your maximum profit is equal to the net credit you receive for closing out the trade, less the net debit you paid to enter the spread. Since the long call calendar spread relies upon stagnation in the underlying stock, your profit is dependent entirely upon your initial cost of entry and the value of the back-month option at front-month expiration. This is impossible to know for sure when you enter the trade, though you can explore possible scenarios by using online profit/loss calculators.

Likewise, while there's no hard-and-fast "breakeven" on the long call calendar spread, you'll need to close both trades at expiration for a net credit that's equivalent to your net debit upon entering the trade.

Potential Losses

Your maximum loss on a long call calendar spread is equivalent to the net debit you paid to establish the trade. Even if XYZ rallies sharply and you're assigned on the short call, you'll be able to exercise your longer-dated call to meet those obligations. Similarly, if the stock plummets sharply, both calls can be left to expire worthless.

Volatility Impact

Since you're simultaneously long and short two call options at the same strike, your relationship with implied volatility in the long call calendar spread is a little complicated. Any positive effect on one option will be offset by negative effects on the other option. However, as the front-month contract draws closer to expiration and begins losing value at an accelerated pace, implied volatility changes will have their greatest impact on the longer-dated option. This means you'd prefer to see volatility rise later in the trade's life span, as it will increase the amount you receive by selling to close the longer-term call.

Other Considerations

The long call calendar spread can be altered to fit a number of different time intervals beyond a one-month gap. If you do choose to implement a spread with a wider time lapse between expiration dates, you might consider rolling out your short call to the next sequential series at the end of each expiration cycle. This generates additional brokerage fees, but it also puts additional credits in your pocket with the sale of each successive call.