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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: FaultLine who started this subject2/5/2002 11:36:17 AM
From: rydad  Read Replies (1) of 5205
 
Good Morning all,

I'm still studying calendar spreads. I was looking at some current stock situations as examples and I was wonderin g if anyone could share some insight on a question I have.

Hypothetically, If I did a calendar spread by selling the NTAP Mar 17.5 for $1.75 and then bought the Sept 17.5 at $4.50 (while NTAP common stock is at 16.5), what will happen if.....

1. the stock goes up above $17.5? According to McMillian's book I could close the spread by buying back the Mar 17.5 at a price which would now be > $1.75 and selling the longer term call at a price > $4.50 (before expiration of the shorter term call).

Would the longer term call (Sept) have gone up more (either dollarwise or percentage wise) than the short term call (Mar)? Does a long term call increase faster or slower than a short term call? My guess is that the long term call increases slower than the short term call and by closing the spread, I am just trying to limit my losses. Am I right? Is it possible for this to still be a profitable situation.

The optimal case would be for the short term call to expire worthless and then the stock starts to move so the long term call increases. right?

In other words, would a calendar spread still be profitable if the stock price goes above the strike price of the short term call and then I close the spread before expiration?

Thanks
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