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This strategy is
implemented when a trader is bullish
on the underlying stock/index in the short term say 2 months or so. A trader
will write one Near Month OTM Call Option and buy one next Month OTM Call
Option, thereby reducing the cost of purchase, with the same strike price of
the same underlying asset.
This strategy is used when
a trader wants to make profit from a steady increase in the stock price over a
short period of time.
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Using calls, the bull
calendar spread strategy can be setup by buying long term slightly out-of-the-money
calls and simultaneously writing an equal number of near month calls of
the same underlying security with the same strike price.
The options trader applying
this strategy is bullish for the long term and is selling the near month calls
with the intention to ride the long term calls for free.
The bull calendar spread
strategy is an excellent strategy for long term options trading, add to the
fact that it has open ended profit potential and limited losses and you can see
why this strategy is so popular.
It’s the perfect strategy
for part time traders to learn since it only contains two contracts spread over
the long term, so you don’t need to sit monitoring it every day like some
shorter term strategies.
Risk: Limited downside risk.
Reward: Unlimited upside profit potential.
Action
Sell 1 Near-Month OTM Call
Option
Buy 1 Mid-Month OTM Call
Option
Example
Suppose NIFTY is trading at
11900 levels, Mr. G is bullish on the market and expects it to rise in the near
future say 2 months or so. The lot size of NIFTY is 75.
He will sell one 12000 NIFTY
near-month OTM Call Option for a premium of Rs. 45 and buy one 12000 NIFTY next-month
OTM Call Option at a premium of Rs. 120.
Result 1: At Near-Month expiry if NIFTY
closes at 11800, then Mr. G will get to keep the premium amount i.e. Rs. 3,375.
(45*75).
At Mid-Month expiry if NIFTY
closes at 11700, then Mr. G will make a loss of premium amount i.e. Rs. 9,000.
(120*75).
His net payoff will result
in a loss of Rs. 5,625. (9,000-3,375).
Result 2: At Near-Month expiry if NIFTY
closes at 11900, then Mr. G will get to keep the premium amount i.e. Rs. 3,375.
(45*75).
At Mid-Month expiry if NIFTY
closes at 11950, then Mr. G will make a loss on premium amount i.e. Rs. 9,000.
(120*75).
His net payoff will result
in a loss of Rs. 5,625. (9,000-3,375).
Result 3: At Near-Month expiry if
NIFTY closes at 12100, then Mr. G will incur a loss of Rs. 4,125. [(100-45)*75].
At Mid-Month expiry if
NIFTY closes at 12400, then Mr. G will make a profit of Rs. 21,000.
[(400-120)*75].
His net payoff will result
in a profit of Rs. 16,875. (21,000-4,125).
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