If I buy a call calendar spread, and the underlying increases, both options are in the money by the expiry of the short call.
So both options increase in value, but the short one increases less because it has more time decay.
So, if I bought the calendar at the money, and the underlying increases 10$, do I lose my entire initial premium that I paid to enter the spread? Or can I salvage some?
- Underlying at 40
- Sell the March 40 call for 1 usd
- Buy the April 40 call at 1.50 usd.
- Results: pay 0.50 usd.
By Mar expiry, assume underlying goes to 45.
So, if both the March and April calls both increased to 5 usd, then I lose the entire initial 0.50 usd.
- Is this the most probable outcome?
- Or Will March increase to 5, and April increase to 5.20 because April still has some time value?
In that case, I can roll out of the spread for a .20 (by buying back March at 5 and sell April at 5.20): the loss would be 0.50 - 0.20 = 0.30 USD instead of the whole 0.50.