Hello again. Casey Jensen here at OptionsANIMAL. Now we're discussing a call calendar, is also known as horizontal spread. You can also say that diagonal spread, that's also known as a call calendar. We're going to talk about the horizontal spread call calendar. So here's how it works.
If a stock's trading at 38, the primary instrument in this trade you're going to buy a call option. So let's say that in this case, we're looking at an August options chain. We're actually going to go out to maybe October to buy our call option. So let's say right here, long call, that's short for just buying a call option, strike price 40. October, 90 days to expire. Maybe it cost me $2 a share. That's the primary instrument. When we buy call options, we want stocks to go up, and that's how we make money.
Now let's look at the August options chain. Now what I'll do is I'll sell as a hedge, same strike price, 40. Again, my calls are over here on the left. We always sell at the bid price, so I bring in 80 cents. So go down here to the bottom, short call now. Strike price 40, now in the month of August, 30 days to expire. I get paid 80 cents. So what that means now is my risk is $1.20, that's the most I can lose in this trade, so it hedges your risk. My reward is unlimited, one of the reasons I love a call calendar. So if you're looking for aggressive growth, this is a great strategy.
Now, ideally with this strategy what you'd like is for a stock, in the short term the next 30 days, to stay stagnant. That way your short option will expire, you'll keep that 80 cents. Then after that, you'd like the stock to run up, and that way your call option that you purchased will make a nice profit. Now depending on how this plays out, you might just as soon as this expires, sell this back and even if you take a little bit of a loss on the call that you purchased, as long as it's not greater than 80 cents, you're going to come away with a profit.
So, really good strategy, again, that's a call calendar. This is a horizontal spread. The difference between a horizontal and a diagonal, the diagonal, all you're going to do is sell different strike prices in different months. So maybe in a future video, we will discuss that as well.