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FRM Part I · FRM Exam Part I · Options Markets

A stock trades at $80. A trader sells a 3-month $80 call for $5 and buys a 6-month $80 call for $8 (a calendar spread). Which statement about this position is correct?

A calendar spread with the long option at the later expiry is a net debit position, here $3, and it earns most when the stock is near the common strike when the short option expires, because the short option decays faster than the long one.

  1. AIt is a net credit position that profits most when the stock moves far from $80 in either direction
  2. BIt is a net debit position that profits most when the stock is near $80 when the short call expiresCorrect
  3. CIt has a fixed maximum loss equal to the difference between the strike prices
  4. DIt profits most if the stock rises sharply well above $80 before the short call expires

Explanation

The long-dated option costs more, so the spread costs 8 - 5 = $3 net debit. The short near-term call decays fastest and the position is worth most when the stock is near the strike at its expiry. Both strikes are equal, so there is no strike-difference limit, and large moves in either direction hurt it.

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