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A horizontal calendar spread to make the most of relatively stable prices for Air Canada shares

Martin Noël
December 1, 2017
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A horizontal calendar spread to make the most of relatively stable prices for Air Canada shares

After having peaked at $28.70 in October, the price of shares in Air Canada (AC) seems to have slipped into a short-term trough at the $22 support level. Since then, the price rallied to $26 and, as of this writing, has settled in at around $24. Prices from $22 to $28 now represent a trading range that could contain price fluctuations in AC for a while. An investor who agrees with this scenario could make the most of relatively stable prices for AC over the next few weeks by implementing a horizontal calendar spread.

 

Daily chart for Air Canada

Position

We build this horizontal calendar spread with put options* as follows:

    • Sell 10 put option contracts AC 180119 P 24.00 at $1.40
      • Credit of $1,400
    • Buy 10 put option contracts AC 180420 P 24.00 at $2.30
      • Debit of $2,300
  •         Total debit of $900

 

Profit and loss diagram

As the above graph shows, we will make the maximum profit of $835 if AC closes exactly at the strike price of $24.00 when the options expire on January 19, 2018. The position will be profitable if AC stays between the two breakeven prices of $22.15 and $26.33. The position’s maximum loss is limited to the $900 debit incurred on the ten contracts.

 

Intervening

Since we do not want to incur the maximum loss, we will need to take action if the price of AC reaches one of the two breakeven prices. The first type of action we could take consists of simply taking the loss by liquidating the position, and then moving on. Another approach would be to implement a second horizontal calendar spread with a price equal to the breakeven price that has just been crossed. This would push the breakeven price a bit further down and give us another opportunity to make a profit, or at least to recover part of the losses incurred on the first position. This second position will be managed like the first one, with new breakeven prices. Of course, this type of action implies taking on the risk of additional losses, so this risk needs to be considered before implementing the new position.

 

*Note that this horizontal calendar spread may also be constructed with call options. The profit and loss diagrams with call options are generally quite similar.

 

Good luck with your trading, and have a good week!

 

The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.

Martin Noël
Martin Noël http://lesoptions.com/

President

Monetis Financial Corporation

Martin Noël earned an MBA in Financial Services from UQÀM in 2003. That same year, he was awarded the Fellow of the Institute of Canadian Bankers and a Silver Medal for his remarkable efforts in the Professional Banking Program. Martin began his career in the derivatives field in 1983 as an options market maker for options, on the floor at the Montréal Exchange and for various brokerage firms. He later worked as an options specialist and then went on to become an independent trader. In 1996, Mr. Noël joined the Montréal Exchange as the options market manager, a role that saw him contributing to the development of the Canadian options market. In 2001, he helped found the Montréal Exchange’s Derivatives Institute, where he acted as an educational advisor. Since 2005, Martin has been an instructor at UQÀM, teaching a graduate course on derivatives. Since May 2009, he has dedicated himself full-time to his position as the president of CORPORATION FINANCIÈRE MONÉTIS, a professional trading and financial communications firm. Martin regularly assists with issues related to options at the Montréal Exchange.

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