BULL CALENDAR SPREAD Using calls, the bull calendar spread strategy can be setup by buying long term slightly out-of-the-money calls and simultaneously writing an equal number of near month calls of the same underlying security with the same strike price. The options trader applying this strategy is bullish for the long term and is selling the near month calls with the intention to ride the long term calls for free. Bull Calendar Spread Construction Sell 1 Near-Term OTM Call Buy 1 Long-Term OTM Call UNLIMITED UPSIDE PROFIT POTENTIAL Once the near month options expire worthless, this strategy turns into a discounted long call strategy and so the upside profit potential for the bull calendar spread becomes unlimited. LIMITED DOWNSIDE RISK The maximum possible loss for the bull calendar spread is limited to the initial debit taken to put on the spread. This happens when the stock price goes down and stays down until expiration of the longer term call. EXAMPLE In June, an options trader believes that XYZ stock trading at $40 is going to rise gradually over the next four months. He enters a bull calendar spread by buying an OCT 45 out-of-the-money call for $200 and writing a JUL 45 out-of-the-money call for $100. The net investment required to put on the spread is a debit of $100. In July, The stock price of XYZ goes up to $42 and the JUL 45 call expires worthless. Subsequently, the price of XYZ stock rises to $49 in October. The OCT 45 call expires in the money and is worth $400 on expiration. Since the initial debit taken to enter the trade is $100, his profit comes to $300. Suppose the price of XYZ did not rise much and remains at or below $45 all the way until expiration of the long term call in October, the trader will lose the initial debit of $100 as both calls expire worthless. NEUTRAL CALENDAR SPREAD If the options trader is neutral on the underlying stock, he can instead implement the neutral calendar spread strategy to sell the near month calls primarily to profit from time decay.