Call Calendar Spreads: Remaining Time Value After a Price Rise
Summary
The document considers a long call calendar spread when the underlying rises above the shared strike by the short option's expiration. It asks whether the spread necessarily loses its entire opening debit, using an example in which the near-dated call is sold and a later-dated call is purchased at the same strike.
The answer explains that the later-expiring call should be worth more than its intrinsic value at the short call's expiration because it retains time value. The amount of that extra value depends on implied volatility and interest rates. Thus, closing or adjusting the spread may recover some value, but the example does not establish a guaranteed recovery or a typical loss amount.
The response recommends exploring option prices under different assumptions with a pricing calculator or spreadsheet scenarios. It provides no probability estimate, market data, or complete payoff analysis. Outcomes depend on the options' remaining time, volatility, rates, and actual prices when the short leg expires.
Key ideas
- A later-dated call generally retains time value after the near-dated call expires.
- The calendar spread's remaining value depends on implied volatility and interest rates.
- A sharp underlying move above the strike does not by itself establish that the initial debit is entirely lost.
- Scenario analysis with option pricing inputs can build intuition about the spread.
- The example does not provide a probability or guarantee of recovering value.
Tags
Full text
# Does a call calendar lose its entire value if underlying increases well past the strike? # Does a call calendar lose its entire value if underlying increases well past the strike? 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? Example: - Underlying at 40 - Sell the March 40 call for 1 usd - Buy the April 40 call at 1.50 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. ## Answer by jaamor (score 2, accepted) https://quant.stackexchange.com/a/16830 The price of the April option will be more than $5.00, correct. How much more depends on the implied volatility ($\sigma$) of the option and the interest rates ($r$). The higher $\sigma$ and $r$ are, the higher the time value of money and the value of the April option. I highly recommend playing around with this calculator to gain an intuitive understanding of BS options pricing. Another good idea is to create your own pricing scenarios in Excel and graph the results of each strategy.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.