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Thursday, July 23, 2009

20 Bullish Calendar Spread Option Strategies

The calendar spread option strategy is a strategy I don't usually write about on, the reason being is because they're hard to grasp at first for most people. However I want to inform you, that once understood, they come second nature. Therefore to understand this post you'll need an understanding of stock options. To learn more about options, how options can help protect your portfolio, and allow you to speculate with less money up front click here or check out my E-Books.

The Calendar Spread Option Strategy is very similar to the Bull Call Spread (a.k.a option spread), but both strike expiration dates are not the same. In this post, I have a table of 20 popular stocks which indicates: which options expiration dates are used for the strategy, the price of opening the position, and the % return (if stock is assigned).

All data as of market close July 22, 2009.


Strategy - This is the strategy used to open the calendar spread option strategy. The option contract which expires at a later date is purchased first (in my examples all happen to be for the January 2011 leap option expiration), and then the option contract which expires at an earlier date is sold against it.

Theo. Price - This is the theoretical price as of market close July 22, 2009. This is the premium paid for the option contract purchased less the premium received for the option contract sold.

Return - This is the return assuming the stock is at or above the indicated strike price from the option contract being sold at that expiration date. Currently all but one of these strategies are in the money (Procter & Gamble not above 55 a share as of market close).

The first stock listed in the table below is Abbott Labs (ABT). An example of this option strategy would be interpreted as:

Purchase the in the money Abbott Labs (ABT) 30 strike January leap 2011 call option, and sell the in the money 44 strike September 2009 call option against it. The cost of this strategy is $1230 per option contract, and if the stock is assigned at September expiration the profit from this position is $170 per contract or 13.82% (58 calendar days). The position will be profitable (not taking into account commissions) as long as Abbott Labs is at or above $42.31 a share by September 19, 2009 (September options expiration).

Company Strategy Theo. Price Return

Abbott Laboratories (ABT) Buy Jan 2011 30.00 Call Sell Sep 2009 44.00 Call $12.30 13.82%
AFLAC (AFL) Buy Jan 2011 12.50 Call Sell Nov 2009 32.00 Call $16.80 13.85%
Apple Inc (AAPL) Buy Jan 2011 65.00 Call Sell Sep 2009 150.00 Call $79.85 6.45%
AT&T (T) Buy Jan 2011 17.50 Call Sell Oct 2009 24.00 Call $5.88 10.54%
Bed Bath & Beyond (BBBY) Buy Jan 2011 7.50 Call Sell 2009 33.00 Call $24.40 4.51%
Caterpillar (CAT) Buy Jan 2011 17.50 Call Sell Sep 2009 38.00 Call $18.47 10.99%
Celgene (CELG) Buy Jan 2011 10.00 Call Sell Sep 2009 47.00 Call $34.60 6.94%
Coach (COH) Buy Jan 2011 10.00 Call Sell Sep 2009 25.00 Call $14.35 4.53%
ConocoPhillips (COP) Buy Jan 2011 25.00 Call Sell Sep 2009 43.00 Call $16.42 9.62%
CVS (CVS) Buy Jan 2011 15.00 Call Sell Sep 2009 32.00 Call $16.15 5.26%
EOG Resources (EOG) Buy Jan 2011 30.00 Call Sell Sep 2009 70.00 Call $37.15 7.67%
Express Scripts (ESRX) Buy Jan 2011 20.00 Call Sell 2009 65.00 Call $43.00 4.65%
GameStop (GME) Buy Jan 2011 10.00 Call Sell Jan 2010 21.00 Call $9.75 12.82%
Goldman Sachs (GS) Buy Jan 2011 55.00 Call Sell Sep 2009 155.00 Call $94.20 6.16%
Google (GOOG) Buy Jan 2011 150.00 Call Sell Sep 2009 420.00 Call $257.80 4.73%
Halliburton (HAL) Buy Jan 2011 12.50 Call Sell Jan 2010 22.00 Call $7.78 22.12%
Harris Corp (HRS) Buy Jan 2011 15.00 Call Sell Sep 2009 30.00 Call $14.20 5.63%
Procter & Gamble (PG) Buy Jan 2011 35.00 Call Sell Sep 2009 55.00 Call $18.45 8.40%
Transocean Inc (RIG) Buy Jan 2011 30.00 Call Sell Sep 2009 75.00 Call $42.70 5.39%
Bank of America (BAC) Buy Jan 2011 5.00 Call Sell Nov 2009 12.00 Call $5.96 17.45%

When I open option calendar spread positions, I like to purchase contracts which have the longest time until expiration, and like to write the contracts with the closest time until expiration against it (given roughly a 5% return if assigned or greater). If the stock is not assigned at expiration, I simply write it out for a similar strike price for the following month.

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

I've been using this strategy to sell near the money calls on my leap options for the short term, and find it to be a great source of generating income for my portfolio. If I want to be long a stock I simply purchase in the money leap options, and write call options for the near term expiration against them. It is a great way to be in the stock, receive income (premiums) month after month (that's if I don't get called out), while returning a profit on the position if the stock happens to be assigned. The downside however is you limit your upside gain for the stock.

In the past 5 years, the volume of option contracts traded has exploded according to the Chicago Board Options Exchange (CBOE). The reason being is that more and more investor's are finding options to be a good source of income, a great way to hedge their portfolios, and a way to speculate with less cash up front. To see a chart showing options volume over the last 5 years, and to learn more about options in general click here.

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