Short calendar

Summary

A short calendar buys a call that ends soon and sells the same $100 call that ends later, the call calendar turned upside down, for when you expect XYZ to make a big move either way before day 30. In the XYZ example you collect $144 and keep close to that on a big move; the worst case is about $201 if XYZ sits at $100 on day 30, a model estimate that rises to $258 if volatility rises to 35%. On day 30 you break even at about $95.03 and $105.60, and you close both calls then, because the sold call left alone has no limit on its loss.

Key terms

short calendar

Buying a call that ends soon and selling the same-strike call that ends later, which collects cash and wants a big move either way.

calendar spread

Selling a near-dated option and buying a later one at the same strike, a bet on time.

credit spread

A spread that pays you to open it.

valley

The dip in a backspread's last-day line, deepest at the bought strike, where a small move loses the most.

near expiry

far expiry

time value

The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.

volatility

The size of the swings a stock is expected to make, written as a yearly percentage, saying how far but not which way.

model estimate

A value worked out by the pricing model, such as a calendar's day-30 result, that changes when volatility changes.