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In this video we will look at a long calendar spread trade on Ford. This video is part one of two parts. In this video, I show the spread trade I placed and in a month, I will make a follow up video and cover the results. This trade is being placed as an example for educational purposes only. It is not intended to be a trade recommendation.
At the time of making this video, Ford is $17.72 a share.
You may remember from the overview video on Long Calendar Spreads, that to place a Long Calendar Spread, a trader buys a longer term call option on a stock- for instance a call option that expires in 2 months- and at the same time, sells a shorter term Call option with the same strike price on the same stock that expires in a shorter time frame- for instance a call option that expires in one month.
To place the trade, I sold 10 contracts of the $18.00 Call Option that expires the 3rd Friday next month, which is 4 weeks from now, for 25 cents a share or $250 total.
At the same time, I bought 10 contracts of the $18.00 Call Option that expires the 3rd Friday the following month, which is 9 weeks from now, for 40 cents a share or $400 total.
Collecting 25 cents a share or $250 and paying 40 cents a share or $400 means that this trade cost me 15 cents or $150 up-front to place.
Because the Call Option that I sold is closer to expiring than the Call Option that I bought, the Option I sold should lose value faster each day from time decay than the Option that I bought.
The goal of this trade is that the Option I sold for 25 cents a share decays and expires worthless whereas the Option that I bought decays slower and therefore loses less than 25 cents of value during this time.
If the price of Ford remains close to $18, the trade should be successful.
However, if Ford moves far enough above or below the $18 strike price, the trade will lose money. If the price of Ford moves away from the Strike Price, the Non-Intrinsic value of the Options declines, bringing the value of the Option that I bought and the value Option that I sold closer together. If the price of Ford moves too far away from $18, the trade will lose money. The max loss on this trade is the 15 cents a share I paid up front to place the trade.
I will make a follow up video when the trade is closed in about a month to go over the results of the trade. I hope that you enjoyed this video. See you in a month.