Strategies · Library · Options
§2.18Volatility
Calendar call spread
Sell a short-dated call and buy a longer-dated call at the same strike. Pays most if the stock sits right at the strike when the short one expires, since the near leg melts faster.
- Asset class
- Options
- Held for
- Varies
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Neutral to mildly bullish, wanting the stock pinned near the strike and implied volatility steady or rising in the long leg.
- Entry and exit
- Buy a longer-expiry near-the-money call, sell a nearer-expiry call at the same strike. When the short call expires near the strike, sell a new short call against the long one; exit if the stock falls below a stop price.
- Sizing
- 1:1 (one long far-dated call, one short near-dated call)
How it fails
- Maximum loss is the net debit paid
- Best gain only if price ends near the strike at the short expiry
- A big move either way shrinks the value of the spread
- Hurt by falling implied volatility; short call can be assigned
Data it needs
- options chain with strikes and premiums
- implied volatility by strike and expiry
- underlying daily price
ARCANE has the underlying daily close but no options chains, strikes or implied volatilities
How ARCANE uses it
Matches a Call that a price stays pinned near a level through a near date, with a longer-term upside lean. Paper only.
Needs two expiries of options.
Filed under the volatility card
Hold less after a month of high volatility and more after a calm one. The paper found this raised return per unit of risk, because volatile spells are not paid for with higher returns.
A paper plan from this card holds 5 to 63 days, stops at 2.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.18, p. 25 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.