% Assnd = |
Max. Profit ÷ Net Investment |
% Assnd = |
(Long Call Value - Net Debit) ÷ Net Debit |
% Dnsd Prot = |
Premium Income ÷ Buy Price of Long Contracts |
% Unch. = |
[Long Call Value (at short-term exp. w/ current stock price) - Net Debit] ÷ Net Debit |
% Dnsd Prot = |
Short Call Bid ÷ Long Call Ask |
Example: |
Stock XYZ at $49.31 per share. |
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Buy JAN 1 Year Out 40 strike call for $13.70 |
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Write (Sell) the Near Month 55 strike call for $0.80 |
% Assnd = |
(Long Call Value - Net Debit) ÷ Net Debit |
% Assnd = |
(17.90 - 12.90) ÷ (13.70 - 0.80) = 5.00 ÷ 12.90 = 38.8% |
% Dnsd Prot = |
Short Call Ask ÷ Long Call Bid |
% Dnsd Prot = |
0.80 ÷ 13.70 = 5.9% |
% Unch. = |
[Long Call Value (if stock stays at $49.31 at short term exp.) - Net Debit] ÷ Net Debit |
% Unch. = |
[13.02 - 12.90] ÷ 12.90 = .68 ÷ 12.90 = 1.0% |
Max. Risk = |
Net Debit = 13.70 - 0.80 = $12.90 |
Max. Profit = |
Long Call Value - Net Debit = 17.90 - 12.90 = $5.00, if stock is at $55.00 |
Long Call Value = |
Black Scholes value of the long call when the stock price is at the higher strike. |
Break Even = |
Stock Price when long call value is equal to net debit = $49.17 |
Write Cycles = |
Months to Exp. of Long Call ÷ Months to Exp. of Short Call |
Write Cycles = |
12 ÷ 2 = 6 |
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When the short-term option is near expiring in-the-money, it is usually more profitable to buy stock on the open market to cover the obligation rather than exercising the long-term option. This is because the long-term option will most likely have some time value left, as a result, it can be more profitable to sell the long-term option rather than exercise it. So, when PowerOptions shows the % Assnd. and % Unch. for these trades, we show the returns using the Black-Scholes value of the long option to approximate the price an investor could sell the option for. |
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To verify the returns that appear on the SmartSearchXL or the OneStrike Tools for Calendar Spreads, simply click the More Info. (little blue button) on the far left of the corresponding row. Select "Calculators" from the More Information Menu and then select "Black-Scholes" for the "Buy Option". For the Long Call Value in the % Assnd calculation, enter the short option strike price value in the "Stock Price" box. Then click the "Use These Hypothetical Numbers" button to calculate the theoretical price of the long option. Scroll down to the date of the short term expiration (In our example, August 20th) to view the calculated value of the long option at short term expiration. |
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To verify the % Unch. value, follow the same procedure but enter the current stock price into the "Stock Price" box on the Black-Scholes calculator tool. This will calculate the theoretical long option value at short term expiration if the stock was unchanged. |
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The calendar call spreads strategy is a BULLISH strategy, the profit can only be realized when the stock price is above the break even point. |
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Buying the LEAP in lieu of the stock can generally allow the stock to be controlled at a discount. In this case the LEAP is purchased for 40% of the stock price, with very little time premium. For options that are nearer term than LEAPs, this advantage will apply less. |
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Losses are limited to the net debit. |
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No stock is actually owned. (uncovered position). |
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One of the principal advantages of this strategy is that one can potentially write the near term calls many times before the expiration of the bought call that expires further out in time. Therefore, the investors' cost for the long call can be greatly reduced with the many writes. |