Long Call Calendar Spread Options Strategy Explained

A long call calendar spread consists of a short call option in a near-dated expiration and a long call option in a further-dated expiration with the same strike price. Since further-dated options are generally more expensive than near-dated options due to extrinsic value, long calendar spreads are purchased for a debit when opened.

A long call calendar spread can appreciate when the price of the underlying it tracks rises and approaches your call option's strike price. Not only can the value of a call calendar rise when the price of the underlying increases sharply and approaches the strike price, but the increase can reflect heightened uncertainty due to any recent price action. In short, call calendar spreads can benefit from increased implied volatility since long options strategies also provide exposure to implied volatility via Vega.

However, long calendars also experience time decay, like any other long options strategy. The value of the long calendar may depreciate over time when the value of the underlying falls or remains constant and does not approach the calendar's strike price. As a result, the underlying price must rise quickly toward the calendar's strike price to make up for any lost value due to time decay. Since calendar spreads are pure extrinsic value trades with a long and short option that offset intrinsic value, it's important to note that as long as both legs are active, intrinsic value does not play a role in the spread’s value. Only after the short option expires can this play a role if the long option is not closed.

Expiration Risk for a Short Call in a Call Calendar Spread

In a long call calendar spread setup, the short call has a closer expiration date than the long call and will have assignment risk implications if in-the-money (ITM), or close to moving ITM near expiration, just like a long call diagonal spread.

Options that expire ITM by $0.01 or more are auto-exercised, resulting in an assignment of 100 short shares of stock for each ITM short call in the long call calendar spread strategy.

Any options strategy involving short options, including a naked short call, may face after-hours risk on the day of expiration. In summary, although the short call may have expired OTM based on the closing price of the underlying, an OTM short call option can become ITM based on any extreme upward price movement after the market close, resulting in an unexpected assignment of short shares. As a result, the investor would assume the risk of 100 short shares per contract assigned. Normally this would yield unlimited risk to the upside, but in the case of a long call calendar spread, the long call option would still exist on the same strike the short call was and offset the intrinsic value risk of the 100 short shares after assignment. With this said, the risk of the position does not change after assignment if it happens, but buying power requirements can shift. The only way to eliminate after-hours risk is by closing any short options positions before expiration.

It is crucial to have a plan, like closing or rolling the position before expiration, if a short share assignment is not part of your strategy. Please visit the tastytrade Help Center to learn more about expiration risk, including more about pin risk and after-hours risk.

Long call calendars can be profitable as the underlying approaches the strike price of the calendar spread, especially if the timing is near the short call’s expiration. Profitability in a long calendar spread occurs when the spread is worth more than the debit paid for the spread up front. Calculating the max profit of a long calendar spread is impossible since the short call leg expires before the long call leg, and we cannot know how much extrinsic value will remain in the long call at that point in time.

The max loss for a calendar spread is the debit paid and can occur when both legs expire OTM and are worthless. The profit and loss diagram below assumes a scenario where both legs are still active and have not been closed or exercised.

A long call calendar spread consists of two legs:

• A long call option in a further-dated expiration
• A short call option in a near-dated expiration

XYZ currently trading @ $45 in February

• Buy to open +1 XYZ June 50-strike call @ $7 debit
• Sell to open -1 XYZ March 50-strike call @ $2 credit

Cost: $5 debit ($500 total)

1. Enter a symbol.
2. Navigate to the Trade tab.
3. Go to the Table mode.
4. Click the Strategy menu.
5. Locate the Calendar strategy and (from left to right) click each column to display Long, Call, and Go.
6. The short leg will display in a red bar and in a near-dated expiration. Drag the bar up or down to adjust the strike.
7. The long leg will display in a green bar and in a far-dated expiration. Drag the bar up or down to match the short leg strike.
8. Go to the order ticket to determine the quantity, price, time-in-force (TIF), etc., before clicking Review and Send. Review the order thoroughly including commissions and fees, then send the order.