Description

The Calendar Call option spread is a variation of the Covered Call. The difference is that the long stock from the Covered Call is substituted with a long-term long call. This reduces the investment and increases initial yield. However this initial yield is not reflective of the maximum yield at the short-term option expiration. The max yield depends on firstly stock price and secondly the residual value of the purchased long-term call.

Steps Involved

1. Buy at-the-money long-term Call

2. Sell short-term call with same strike price

Rational

The idea behind a Calendar Call is to generate income against the long-term call by selling calls with short dated expiry to capitalize on the differential in time decay, similar to buying in bulk.

Often the calendar spread strategy is referred to as a poor mans covered call. The reason behind this is the bought call, has a similar payoff to owning shares, however with a limited risk profile. The sold call, can be sold each month, similar to selling calls over bought stock for income. The advantage of this is the low capital requirement.