FRM Part I · FRM Exam Part I · Options Markets
A trader buys a 3-month 100-strike call for USD 8 and sells a 6-month 100-strike call for USD 11 on the same stock. Which description fits the position, and what is the initial cash flow?
This is a calendar spread because both calls share the 100 strike but have different maturities. The trader pays USD 8 and receives USD 11, so the initial cash flow is a net credit of USD 3.
- ACalendar spread; net credit of USD 3Correct
- BCalendar spread; net debit of USD 3
- CDiagonal spread; net credit of USD 3
- DBull spread; net debit of USD 19
Explanation
Same strike with different expiries is a calendar (time) spread. Here the trader buys the near-dated call and sells the longer-dated one, a reverse calendar. Cash flow = +11 - 8 = +3, a credit. Diagonal spreads differ in both strike and expiry, so that option is wrong.
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