The ITM Calendar Call is a bearishly oriented option strategy, with a sweet spot below the current stock price.

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Strategy: Calendar Call, ITM

a.k.a. Horizontal Spread, Time Spread

The Outlook: Bearish on stock price movement, and Implied Volatility currently low or normal. The expectation is that gains will be made from the passage of time as well as a drop in the stock price.

The Trade: Sell call(s) using the next strike price below the current stock price, and a near term expiration date, and buy call(s) using the same strike price and an expiration date further out in time.

Gains when: Stock moves lower, while near term short calls lose value due to the passage of time.

Maximum Gain: Must use an options calculator or graphing software. Usually more than the initial debit.

Loses when: Stock falls below the lower breakeven point, or does not fall below the upper breakeven point, or before expiration if volatility falls too much.

Maximum Loss : Limited to the initial debit.

Breakeven Calculation: There are two breakeven points, above and below the ITM strike. An options calculator or graphing software is necessary to calculate because the breakevens depend on the volatility.

Advantages compared to short stock: Increased leverage, much less capital required, "built-in" stop loss.

Disadvantages compared to short stock: Greater risk of 100% loss of the capital invested.

Volatility: after entry, increasing implied volatility is positive.

Time: after entry, the passage of time is positive IF the stock moves lower.

Margin Requirement : None. Initial debit must be paid in full.

Variations: Calendar Call, ATM; Calendar Call OTM.

Synthetic Equivalent: No true synthetic, but a Calendar Put using same strikes and expiration dates is a nearly identical position.

Comments

• An ITM Calendar Call can be used instead of positioning bearishly with short stock, ATM long puts, OTM long puts, or ATM Bear Puts.
  • Compared to short stock, the strategy has much less risk and more leverage.
  • Compared to ATM long puts and ATM Bear Puts, the initial debit is less, which means the breakeven point is closer.
  • Compared to OTM long puts, much less stock movement is needed for a gain. The ITM Calendar has it's maximum gain where the OTM long put would still not be at breakeven.
  • And compared to either type of put by itself, the passage of time helps the Calendar, IF the stock falls.
  • However, the ITM Calendar Call has a "sweet spot", and if the stock falls too much the position will be hurt. This is not the case for any of the other positions.

• The upper and lower breakeven points of a Calendar Call are determined by the volatility of the stock. A stock with higher volatility will have a wider range of profitability. However, buying a Calendar Call when the stock is at historically high volatility is a bad idea. The volatility returning to normal levels can easily overcome the gains from both the stock price falling, and the passage of time.

• Other variations of Calendar Calls can be used if you have a near term neutral or bullish opinion on a stock or ETF, and want to target a "sweet spot" at or higher than the current price. See Calendar Call, ATM for a neutral strategy, and Calendar Call, OTM for a bullish strategy.

Exits

• Since this is a bearish position, the trader is expecting the stock to fall. If the stock does not fall, it is usually wise to exit the trade, taking less than the maximum possible loss. Using the graph at the top of the page, you might exit if the stock rose to about 52 within two weeks, and your loss would be about half the maximum possible.

• Many Calendar Call traders with a gain try to be out of the trade with a week left to expiration. See the Delta Neutral Trading page for reasons why.

• Over the long term, successful Calendar Call traders try to beat the market by having many small gains, and fewer small losses. They do not usually take the maximum loss nor try to squeeze every penny out of the winners.

Adjustments

• If the stock stays near or moves near one of the breakeven points, it is possible to adjust a Calendar Call into a "Double Calendar" by buying another Calendar Call at a higher or lower strike price, whichever way the stock is moving. This will give a higher overall breakeven point if the stock is moving up, or lower if the stock is moving down. However, this is not a guaranteed fix: the stock could whipsaw.

• A "Double Calendar" is very similar to a "Double Diagonal".