Disposition: Neutral or Mildly Bullish Short Term + time decay (first leg)
How it Works
A Calendar Spread typically involves buying and selling the same type of option (calls or puts) for the same underlying security at the same strike price, but at different expiration dates.
For a call Calendar spread, we sell calls on front strike and buy calls on back strike. Expectation is that price will remain under sold strike and or decrease in the short term up until the first strike expiration date. After, we expect the price to rise over the second strike.
We want this trade to be neutral or bullish up to the strike-through the first expiry and then bullish into the second.
Sell Mar 16th AAPL 430 Calls
Buy Apr 14th AAPL 430 Calls
Beauty here (longer-term) is that on the March 16th / Apr 14th, we can continue to sell 430 calls up until Apr 14th if price stays below that point. In a perfect world, after the last one is sold, it would then break $430 and you would make money on the back 430C strike.
Note that a raise in price up to but under $430 price will allow you to keep full premium for sold strike (front leg) while raising the value of the purchased call (back leg).
Max Profit and Max Loss
Max Profit: Not Defined (depends on outcome of front leg and if price continues to be bullish into the back leg.
Max Loss: Initial Debit for Selling Call
Risk Management & Strategy
1. Position size: 3 - 5% of your total account value
2. Be ok with not being able to take every trade that does not make sense
3. If entering more than 1 contract, exiting a portion of the position as the trade develops (in this case with time getting closer to exp) is a great way to reduce loss and secure profit on the first leg.
5. Have a predetermined set amount you are willing to lose and gain (OCO order is a great way to take emotion out of trading)
6. Practice executing this trade in a simulator prior to attempting in live account
Pro tip: knowing where there could be support and resistance will help set realistic profit and loss goals.
Note: If sold call gets exercised, the long call will be offset
Note: Selling call OTM means you have a short term bullish outlook vs Selling Call ATM / ITM which means you have a short term bearish outlook of the price not going any higher until back leg expiration. Depending on where we sell the front strike, it determines our outlook.