Reverse Calendar Spread with Calls

Overview:

Calendar spreads often require significant diligence from investors due to the options expiring in different months. The strategy is also referred to a as a ‘time spread’ due to the different expiration months. The investor employs this strategy by purchasing an at-the-money call option in the earlier month and selling an at-the-money call option in the later month.

Main Uses:

1. The first reason an investor would invest in a reverse calendar spread with calls is purchasing volatility at a hopefully low price.
2. The second reason an investor would invest in a reverse calendar spread with calls is if the investor expects the underlying stock price to move significantly between now and the expiration of the front-month call option.

Profit / Loss Reverse Calendar Spread with Calls

The below graph is a profit / loss graph of a reverse calendar spread with calls using the OptionsHouse P&L calculator. The current stock price is $114.08. An at-the-money call option was purchased with an expiration during this month with a strike price of $114. An at-the-money call option was sold with an expiration during next month with a strike price of $114. The break-even prices are $112.38 and $115.72. If the stock price increases or decreases above or below the break-even prices respectively; the investor will make money.

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