Introduction
The Call Calendar Spread, also known as a Time Spread, is a powerful options trading strategy that profits from time decay (theta) and changes in implied volatility (IV). This strategy involves buying and selling call options with the same strike price but different expiration dates.
The Call Calendar Spread is best suited for traders who expect the underlying stock to stay near the strike price in the short term but anticipate increased volatility or price movement near the long expiration date.
In this blog, we will explore the Call Calendar Spread strategy, how it works, its benefits and risks, and how to execute it efficiently using Algomojo.
What is a Call Calendar Spread?
A Call Calendar Spread is an options strategy that consists of:
- Selling a short-term call option (near-term expiration)
- Buying a long-term call option (longer expiration)
- Both options have the same strike price but different expiration dates.
This strategy allows traders to profit from time decay in the short option while maintaining long exposure for potential price movement.
Structure of a Call Calendar Spread
The strategy involves two options contracts:
- Sell 1 Near-Term Call Option (Short Expiry)
- Buy 1 Long-Term Call Option (Long Expiry)
This setup creates a net debit position, meaning the total cost is the difference between the two option premiums.
Example of a Call Calendar Spread
Assume Stock XYZ is trading at ₹100, and you execute the following trades:
- Sell 1 short-term call option at ₹100 (Expires in 1 month)
- Buy 1 long-term call option at ₹100 (Expires in 3 months)
Profit Scenario
- If XYZ stays close to ₹100 at short expiry, the short call loses value due to time decay, resulting in profit.
- If XYZ rises near long expiry, the long call gains value, providing additional profit.
Key Takeaways
✅ Time Decay (Theta) Profit: The short-term call loses value faster than the long-term call.
✅ Limited Risk: Maximum loss is the net debit paid for the strategy.
✅ Potential for Large Gains: If volatility increases near long expiry, the long call benefits.
✅ Low Capital Requirement: Requires lower margin compared to directional strategies.
Payoff Structure of a Call Calendar Spread
- Maximum Profit: Occurs when the underlying remains near the strike price at short expiry.
- Maximum Loss: Limited to the net premium paid.
- Break-even Points: Depend on IV changes and time decay.
| Scenario | Impact |
|---|---|
| Price stays near the strike at short expiry | ✅ Maximum Profit |
| Price moves far from the strike | ❌ Loss due to short call exposure |
| Volatility increases | ✅ Gains in long call value |
| Volatility decreases | ❌ Loss as long call loses value |
Advantages of a Call Calendar Spread
📉 Profits from Time Decay: The short call loses value faster.
📊 Works in Low Volatility Markets: Ideal when the underlying is range-bound.
🛑 Limited Risk: Loss is capped at the net premium paid.
📈 Volatility Advantage: If IV increases, the long call gains value.
Risks and Considerations
❌ Directional Risk: If the stock moves too far, the short call may cause losses.
❌ IV Impact: A drop in volatility reduces the value of the long call.
❌ Rolling May Be Required: Traders may need to adjust the short call before expiration.
Step-by-Step Implementation in Algomojo
With Algomojo, traders can seamlessly execute Call Calendar Spreads using automated order placement and execution.
1. Create a Sell ATM Call for Short Expiry (Leg 1)
📍 Path: My Strategy → New Strategy
- Choose a near-term expiration date.
- Select the ATM (At-the-Money) strike price.
- Ensure the correct lot size and margin before execution.
2. Create a Buy ATM Call for Long Expiry (Leg 2)
📍 Path: My Strategy → New Strategy
- Choose a longer expiration date.
- Select the same ATM strike price.
- Ensure the correct lot size and margin before execution.
3. Group the Strategy
📍 Path: My Group Strategy → New Group Strategy
- Combine both legs into a single Call Calendar Spread.
- Name the strategy for easy identification.
4. Enable Paper Trade Mode
📍 Path: My Group Strategy
- Test the strategy before executing in a live market.
- Validate the position behavior with simulated market movement.
5. Generate BUY Signal
📍 Path: My Group Strategy
- Click BUY to place both orders simultaneously.
6. Executed Paper Trade Orders
📍 Path: My Group Signals → Orders
- Verify that both legs are successfully placed in the Order Book.
- Ensure all contracts have been filled at your intended strike and expiration.
7. Monitor Open Positions
📍 Path: My Group Signals → Positions
- Track price movement and implied volatility (IV) changes.
- Monitor the effect of time decay (Theta) on the short call.
8. Generate a SELL Signal to Exit the Trade
📍 Path: My Group Strategy
- If the stock stays near the strike price, exit the trade for profit.
- If IV increases, consider holding the long call for further gains.
9. Confirm Closing Orders
📍 Path: My Group Signals → Orders
- Ensure both legs are exited at the intended price levels.
- Validate the final PnL impact before settlement.
10. Review Trade Performance
📍 Path: My Group Signals → Positions
- Analyze profit/loss metrics and strategy efficiency.
- Check how IV and time decay affected the trade outcome.
- Optimize future Call Calendar Spread strategies based on insights.
Frequently Asked Questions (FAQ)
1️⃣ How is a Call Calendar Spread different from a Put Calendar Spread?
📌 Call Calendar Spread: Used when traders are neutral to bullish.
📌 Put Calendar Spread: Used when traders are neutral to bearish.
2️⃣ What happens if the stock moves far from the strike price?
📌 If XYZ moves significantly away from ₹100, the short call may cause losses.
📌 Traders may need to roll the short call forward.
3️⃣ Can I use an OTM Call for a Calendar Spread?
📌 Yes, you can create a bullish calendar spread using an OTM Call.
📌 However, ATM options generally perform better for neutral strategies.
4️⃣ Does this strategy work in high volatility markets?
📌 Not ideally. Call Calendar Spreads work best in low-volatility environments.
📌 However, an increase in IV helps boost profitability.
5️⃣ Can I execute this strategy manually?
📌 Yes, but Algomojo automates execution, reducing manual errors.
Final Thoughts
The Call Calendar Spread is a powerful strategy for traders who expect low short-term volatility but want to take advantage of time decay and potential IV expansion.
By using Algomojo, traders can efficiently execute, monitor, and refine this strategy with automated multi-leg execution and real-time tracking.
💡 Have you tried a Call Calendar Spread before? Share your experience in the comments! 🚀🔥