Reverse Calendar Call Strategy: Part 13 of Options Trading for All Types of Market Environments

March 8th, 2013Michael

Investors who want to participate in this market can use options to limit their risk to an adverse move.

Today we investigate the simple Reverse Calendar Call Option Strategy of selling and buying calls of the same strike price, but different expiration months, to participate in profits when the underlying stock price moves sharply in either direction. These options spreads with the same strike price are called Horizontal Call Spreads.

This form of short calendar spread benefits from a sharp move in the underlying stock, while simultaneously putting reward/risk ratio in your favour. It also has the unique characteristic of having a much higher maximum potential profit than maximum potential loss.

The S&P/ASX 200 has had a fantastic few months since it bounced sharply off its November lows. Stocks have been moving sharply in the direction of their underlying trends, as seen with the banks’ unrelentingly move higher, while the resource stocks have been moving in the opposition direction (in-line with the falling commodity prices).

There are a number of reasons why a long term investor may not want to jump into an outright stock position in this market environment, including the risk of a pullback near-term.

Reverse Calendar Call Option Strategy

The Reverse Calendar Call Spread is a volatile options trading strategy that profits when the underlying stock breaks out to either the upside or downside. We will discuss the Short Horizontal Calendar Call Spread today where the strike price is constant and the expiry months are different.

As mentioned earlier, this form of short calendar spread has a much higher maximum potential profit than maximum potential loss, putting the reward/risk ratio in your favour. This compares favourably with most other volatile options strategies that have a larger maximum potential loss than maximum potential gain.

For the trader of this type of strategy, the maximum profit is limited to the initial credit received for the spread, while the maximum risk is also limited.

When To Use

The Reverse Calendar Call Spreads can be used when you want to profit from a stock that has an equal chance of breaking out to upside or downside. This strategy would have an equal profitability no matter which direction the stock breaks. Therefore, if the direction of the stock’s breakout is uncertain the Reverse Calendar Call Spread would be a better choice than a straight out directional trade.

Why would you use the Reverse Calendar Call Spreads?

1) Limit the Margin Requirement – unlike other more complex credit volatile options strategies, this strategy with both short and long term options at the same strike price requires a limited margin and may not even be subject to margin at some options trading brokers.
2) Rewards Exceeds Risk – most Reverse Calendar Spreads have a higher maximum potential profit than maximum potential loss.

Risks and Profit Potential

The Reverse Calendar Call Spread strategy makes its maximum profit potential when the underlying stock stages a breakout to either the upside or downside that is significant enough to erode out all of the extrinsic value “time premium” on the long term short call options, due to “moneyness” which determines if intrinsic value exists in an option and directly affects the delta value of stock options which in turn determines the profitability of options held.

The maximum loss occurs when the underlying stock remains stagnant, when the short term at the money call options expire worthless and the long term at the money call options do not reduce enough value due to time decay to offset the loss on the short term call options.

The value of a Reverse Calendar Call Option Strategy, during the course of the trade and prior to the expiration of the short call options, can only be arrived at using an options pricing model such as the Black-Scholes Model, which can determine the expiration value of the longer-term call options.

Equally the breakeven point of a Reverse Calendar Call Spread is the point below which the position will start to lose money if the underlying stock stays stagnant and can only be calculated using an options pricing model.

In summary the keys to the risk/reward of a Reverse Calendar Call Spread at expiry are:
* the upside maximum profit is limited (limited to net credit received)
* the maximum loss is limited

Time Decay

Time decay is the enemy of most options traders, particularly those who are long options. Some traders visualise the impact of time decay like PACMAN, because it continuously eats away at the value of the option, particularly if the underlying stock trades sideways. In the Reverse Calendar Call Spread, time decay is working against you and you need a sharp move to overcome this.

Advantages & Disadvantages of the Calendar Call Spread

The primary advantage of a Reverse Calendar Call Spread is that it has greater maximum potential gain than potential loss. This strategy will profit if the underlying stock moves sharply to either the upside or the downside, before the short option expiry. Note – if you expect a major move in the short-term you may want to consider a Short Diagonal Calendar Call Spread (a subject for another article).

If the trade acts according to the initial trade plan, the moment the extrinsic value “time premium” of the long and short term options are almost completely eroded due to a significant breakout, the position should be closed and profit taken. There is no need to hold until expiry, because the mechanics that makes this options trading strategy work is the breakout, not time decay.

There are disadvantages in using this type of spread, because profits will be limited and losses can also be sustained if the implied volatility of the options rises.

Also as this is a credit spread, margin will also be required for this strategy.

Recent Trade – OZ Minerals (OZL)

A recent trade was to buy an OZL Reverse Calendar Call Spread, three weeks prior to the March options expiry.

OZ Minerals (OZL) has been in a sustained downtrend for the past two years. The stock price has suffered a 65% slide since its all-time peak when it was trading at over $16.50. The share price has since fallen to around $6.00 and is trying to establish support around this level. The trade was entered in anticipation of a sharp move away from the $6.00 level. While the chart looked oversold there was a chance OZL could continue falling below the $6.00 level, so the trade was entered to profit from a sharp move to either the upside or downside, while helping to reduce the risk.

To profit from this view we proposed an OZL Reverse Calender Call Spread. The objective of this trade is for OZL to have a sharp move to either the upside or downside prior to expiry. So as well as trying to profit from a sharp bounce from OZL, we can also profit from a sharp fall in the share price too. To put it more simply, we felt OZL will move sharply from the current level before March options expiry (27 Mar’13).

The maximum possible profit on this trade is the initial credit received and would be achieved if OZL moved sharply away from the strike $6.00 level by the March options. The maximum risk is limited on the trade; this would occur if OZL remains around the $6.00 level at March options expiry and the trade is defeated by the time decay.

Oz Minerals Reverse Calendar Call Spread
CHART 1: OZ Minerals (OZL) Reverse Calendar Call Spread

Trade Details

The trade was entered when OZL was trading around $6.00, three weeks prior to expiry. The trade was established by Buying to Open OZL 600 MAR13 Call for 23.5c and simultaneously Selling to Open the OZL 600 MAY13 Call for 44.5c. The total credit was the 21 cents premium received. Note the implied volatility (IV) in these options is above 41% which is at the upper limit of its normal range and this trade will benefit if this IV falls before March expiry.

Payoff Diagram at March Expiry
Oz Minerals Trading Strategy Payoff
CHART 1: Payoff Diagram at Expiry for the OZL Reverse Calendar 600 MAR13/MAY13 CALL Spread

The upper and lower breakeven levels for this trade at expiry are $5.52 and $6.59. Maximum risk is 21c and would occur if OZL stays stagnant at the short option expiry.

Note if your view changed during the trade, you could have bought back the short call or closed the trade prior to expiry.

Trade Risks and Profit Potential

This Reverse Calendar Call Spread strategy offers limited upside profit, while the maximum risk is limited to the Net Credit Received. These risk/rewards are shown in the Payoff diagram above.
Note the Reverse Calendar Call strategy can be used in order to gain an exposure to OZ Minerals, while limiting the outlay and risk in the trade.


The trade is still in progress, but the OZL shares need to move sharply away from the current price level by the short option expiry in order to profit.

To Recap…

Options can be used in order to gain leveraged exposure with limited risk, while still participating in potential profits from various movements in the underlying stock. The Reverse Calendar Call strategy can be used to allow you to participate if the stock moves sharply to either the upside or the downside before the short option expiry, while limiting your loss in the trade.


The market volatility has been at unprecedented lows since bouncing from the November lows. There is another trade setting up right now, that you could potentially profit from. If you would like more information please contact me at 1300 610 024 or email

For trade ideas and recommendations on how to trade in this market, sign up for a free trial of the D2MX Daily Trading Report, which provides a daily serving of insightful market analysis from the D2MX Advisory team, including:

• Trade ideas and strategies
• Dividend enhancement strategies
• Market scans to watch
• International market analysis, and
• Highlights from the S&P/ASX 200

To request an obligation-free trial, call 1300 610 024 or email

Michael Hevern
Investment Adviser – D2MX Trading

Options Trading for All Types of Market Environments

Part 1: The Protective Put
Part 2: The Covered Call
Part 3: The Covered Call Collar
Part 4: The Stock Repair Strategy
Part 5: Limited Risk Short Selling Strategy
Part 7: Dividend Capture Covered Call Collar
Part 8: Hedging With a Bear Put Spread
Part 9: The Bull Call Strategy
Part 10: Dividend Capture Covered Call Collar
Part 11: Calendar Call Strategy
Part 12: Bull Call Spread Strategy

This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of D2MX Pty Limited ABN 98 113 959 596, AFSL No. 297950 (D2MX), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by D2MX, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.
Disclaimer: Using leverage to invest can be a two edged sword, as it can magnify your returns when the stock price rises, but will in turn magnify the losses if the trade does not perform as expected.

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