Calendar call option spread — how to deploy horizontal spreads
Call calendar spread trading is an options trading strategy that seeks to profit from the changing prices over time of two options contracts with different expiry dates. Call calendar spreads are formed when a trader buys or sells a longer-dated call contract and takes the opposite position in a shorter-dated contract with the same strike price at the same time. Call calendar spreads are sometimes known as time-spreads or horizontal spreads. Their profit arises from the two contracts’ relative time decay (or price change) as expiration approaches.
In this article, we introduce the call calendar spread and explain when using the strategy might be advantageous. We then cover the strategy’s risks and demonstrate how to trade horizontal spreads across different OKX products. Let’s go!
What is a call calendar spread?
As an options trading strategy, it’s essential to understand how options contracts work before continuing with this guide or attempting to place a call calendar spread. If you’re unfamiliar with options trading, check out this dedicated guide.
Call calendar spread trading is the simultaneous buying and selling of an equal quantity of call options contracts with the same underlying asset, same strike price but different expiry dates. When buying a call calendar spread, the trader will sell a shorter-term call contract and buy a longer-term contract. When selling a call calendar spread, the trader will buy a shorter-term options contract and sell a longer-term contract. Both buying and selling horizontal call spreads create “market neutral” positions.
When buying or selling a call calendar spread, the trader pays the mark price for the long (bought) contract but receives the mark price for the short (sold) one. The difference between the two prices is the cost to enter the trade — also known as a “debit.”
The strategy revolves around the concept of “time decay.” Options contract prices are influenced by their term length. A shorter-term contract’s premium will typically be lower than a longer-term contract because the latter contract has a longer window in which the price can move into the money.
As an options contract’s expiry approaches, an out-of-the-money option’s mark price reduces due to this dwindling likelihood of profitability for its buyer. When buying the horizontal spread, the spot price at the near-term contract’s expiry will ideally be at or below the strike price, meaning that it expires worthless. The trader can then sell the longer-term contract or leave it open in the hope of a price rally, potentially resulting in a profit. The opposite is true when selling a call calendar spread.
The key characteristics of a call calendar spread trade are:
- Must comprise two positions and only two positions
- Positions must share the same underlying asset
- Legs must be opposite (i.e., buying one and selling the other), but both must be call options
- The strategy is market neutral
- The contracts must have different expiry dates
- Both legs of the spread must be an identical quantity
- Both legs must have an identical strike price
Call calendar spread example
To further understand how buying a call calendar spread works, let’s consider the strategy with a few different outcomes.
It’s early July, and the BTC spot price is 20,000 USDT. The trader buys an Aug. 14 BTC call option with a strike price of 20,000 USDT. The mark price for this contract is 500 USDT. At the same time, the trader sells a July 14 BTC call option with a strike price of 20,000 USDT. The mark price for this contract is 200 USDT.
The trader spent 500 USDT and received 200 USDT, meaning the two legs cost a total of 300 USDT to enter.
Scenario 1
On July 14, the BTC spot price is now 15,000 USDT. The near-term contract expires worthless because its buyer would not choose to exercise a contract to buy BTC at 5,000 USDT above the current market price.
Meanwhile, the Aug. 14 contract will almost certainly be worth less than the original mark price. It may still have value because there is a chance that over the next month, the BTC price will return to 20,000 USDT or more.
If the trader chooses, they can sell the contract for its current mark price. Suppose the current mark price is 100 USDT. If they exit their position, they will receive 100 USDT, resulting in a total loss for the trade of 200 USDT. The contract might also be trading a 0 USDT, making their loss the total cost of the original trade and no more.
Alternatively, they can leave the position open in the hope that the BTC price rises, which will increase the August call option’s mark price, potentially resulting in a profit (or at least a smaller overall loss). If the contract expires worthless by mid-August, their total loss is still just the cost of the original trade (300 USDT).
Scenario 2
On July 14, the BTC spot price is 25,000 USDT. The near-term contract has a much higher mark price (the option to buy BTC at 5,000 USDT below the market price is obviously appealing). At expiry, the mark price will be exactly the difference between the spot price and strike price — 5,000 USDT.
However, the longer-dated call has a higher mark price because, over the next month, the BTC price might continue rallying. Let’s say its mark price is now 6,500 USDT.
If the trader closes both positions at this point, they will spend 5,000 USDT to buy back the near-term call, and they will receive 6,500 USDT for selling the longer-dated option. The net result will be 1,500 USDT profit. The trader initially spent 300 USDT to open to position and received 1,500 USDT when closing. Therefore, their overall profit is 1,200 USDT.
If they leave the longer-dated option open, their profit may increase if the BTC spot price continues to grow. However, the price could reverse such that the call is no longer in the money. This carries greater risk since their maximum loss would be 5,000 USDT from closing the near-term call plus the cost to open both legs of the calendar call spread — a total of 5,300 USDT.
Scenario 3
On July 14, the BTC spot price is still at 20,000 USDT. The near-term contract expires worthless as there is no point in exercising a contract to buy BTC at exactly the spot price. However, the longer-term call might now have a much higher mark price of 1,000 USDT because there is a reasonable chance that the spot price will move upward over the next month, and the BTC price does not need to grow much to put the contract into the money.
With the near-term call expiring worthless, if the trader chooses to exit the longer-term contract here, they will receive 1,000 USDT for selling the call. This would result in a net profit of 700 USDT because the initial trade cost 300 USDT, and selling the longer-term contract resulted in a 1,000 USDT gain. Again, they could leave the longer-term call open, potentially increasing their profit if the price rallies, or resulting in a maximum loss of the 300 USDT spent to open the position if the BTC price declines.
Why trade a call calendar spread?
Call calendar spreads are popular because they offer a way to limit risk in a market while benefiting from potentially unlimited upside. If both contracts expire worthless, the maximum loss is the debit paid to enter the trade.
Meanwhile, the slower relative price decay of the longer-term call provides a means of profiting even when the market stays flat. If the price does increase throughout the longer-term contract, potential profits also grow while risk remains limited to the debit — providing the trader closes the longer-term contract at the near-term expiry.
The strategy is also attractive when underlying price volatility is low. With low price volatility, the difference between the near- and longer-term mark prices will be narrow, meaning the debit (or cost to enter the trade) will be low.
In the typically volatile cryptocurrency markets, there is a strong chance that volatility will increase, which will have an outsized impact on the mark price of the longer-term contract. Options’ mark prices usually increase during periods of heightened volatility because the chance they will expire in the money also grows when prices move faster over a short period. Simply put, buyers are willing to pay more for a call, and sellers demand a higher premium to account for the higher risk they are taking on.
Call calendar spread risks
When both legs of a calendar spread are entered simultaneously, and the trader closes the longer-term call at the near-term expiry, the strategy’s risk is limited to the cost of the debit. However, if the trader does not sell the longer-term call at near-term expiry, there are scenarios where losses can extend beyond the debit.
If we consider the above example again with the BTC spot price at 40,000 USDT at the July 14 expiry, the trader’s loss when closing the near-term position will be 20,000 USDT. If they choose not to close the longer-term contract immediately, a sudden price decrease could put their longer-term call out of the money, meaning they may be unable to sell it to recover losses incurred by the short-term contract. Since an asset price has potentially unlimited upside, these losses are also technically unlimited. However, this risk is mitigated by selling the longer-term contract immediately at the near-term expiry.
Execution risk is also a factor when trading any multi-leg strategy. If attempting to make two simultaneous trades manually, there is a chance that one leg fills at the price you wanted and the second does not. This is particularly risky when selling options contracts, which is required to enter a call calendar spread. Since selling a naked call has unlimited downside potential for the trader, we do not recommend attempting to do so manually. Fortunately, OKX provides various tools — such as our sophisticated block trading platform — to ensure execution risk is avoided entirely.
Getting started with call calendar spreads on OKX
OKX provides various tools for trading multiple options strategies, including call calendar spreads. We’ll add additional features to deploy options spread trades quickly and easily over the coming weeks and months. As we do, we’ll be detailing them in this tutorial.
While you can enter call calendar spreads manually, we don’t recommend inexperienced traders attempt it. The main issue with doing so is execution risk. If only one leg of the trade fills, the position is not market neutral. This is particularly risky if only the short side of your call calendar spread executes because losses are potentially infinite when selling options contracts.
Block trading
OKX’s powerful block trading platform provides various predefined strategies, enabling you to enter multiple multi-leg positions while avoiding execution risk.
We’ve prepared an extensive guide to get started with block trading. If you’re new to the feature, we recommend starting with that tutorial to familiarize yourself with the platform and its functions.
To set up a call calendar spread, select the underlying crypto you want to trade using the highlighted menu from the “Predefined strategies” section. Next, click Calendar and then Call Calendar Spread.
Two call option trade legs will appear in the RFQ Builder. First, select each leg’s expiry and strike price. Then, enter the amount you want to trade. You can also change whether the leg is a buy or sell using the green B and red S buttons.
In the above example, we request quotes for the BTCUSD 221230 call and the BTCUSD 220930 call, each with a strike price of $25,000. We’re buying the spread, so we will sell the near-term and buy the longer-dated contract.
Next, select the desired counterparties from which you want to receive quotes.
After you’ve checked all your trade details, click Send RFQ.
On the RFQ Board, you’ll see quotations from the counterparties you chose under the “Bid” and “Ask” columns. The figures shown are price differences for buying and selling your chosen instruments. The creation time, time remaining before your quotes expire, the position’s status and quantity, and the counterparty making the quote are also shown.
Click Buy to buy the spread or Sell to sell the spread.
Check your trade details on the confirmation window. Then, click Confirm Buy or Confirm Sell. If you need to make any changes to your orders, click Cancel.
The beauty of OKX’s block trading platform is that both legs will fill simultaneously, eliminating any potential execution risk.
After completing your trade, your position will appear at the bottom of the RFQ Board in the “History” section. It will stay there for one week, after which you can find it by clicking view more.
A call calendar spread is a multi-leg strategy requiring action on your behalf after placing your order. You might wish to exit either position before or at the near-term contract’s expiry. To do so, find your open positions in the trade history section of “Margin Trading.” You can then close either position with a limit or market order — hopefully for a profit!
Profit from call calendar spreads on OKX
The call calendar spread is a powerful trading strategy that lets you take advantage of an options contract’s natural price reduction as expiration approaches. By taking opposite positions in the same market, you can easily manage risk while still having the potential to take full advantage of crypto’s notorious price volatility. When managed correctly, your downside is limited to the debit only, and if the market moves particularly favorably, you can lock in outsized returns. As our examples demonstrate, you can even profit when the market barely moves at all.
Although some traders are intimidated by multi-leg options trading strategies, as you can see, they aren’t overly complicated. With OKX’s powerful tools and features — such as our cutting-edge block trading platform — you can trade the potentially lucrative call calendar spread strategy with zero execution risk. Game on!
