Profiting From Expectations of Relative Stability

Martin Noël
August 20, 2019
6 minutes read
Profiting From Expectations of Relative Stability

Shares in Cogeco Communications Inc. (CCA) were trading at $104.36 at this writing on August 9, 2019, but as the following graph shows, they jumped on July 10 when the company released its latest financial results. After topping out at $107.05 on July 16, prices moved in a relatively narrow corridor of $103.33 to $107.35. The same phenomenon was observed the last three times that the company published results. An investor who believes that the security may once again move within a limited price range over the next few weeks could implement a calendar spread strategy, using call options to take advantage of this period of relative price stability.

Graph 1: Daily Price Changes for CCA to August 9, 2019 ($104.36)

Source :

Calendar Spread Strategy Using Call Options

The calendar, or horizontal, spread strategy consists of buying a call option with a long expiration and writing another call option with the same strike price but a shorter expiration. This strategy is designed to take advantage of: (1) the stock price staying relatively stable around the level of the strike price until expiration of the option written, and (2) the options’ time value decay, which occurs faster for the short-term option than for the long-term option. This strategy has two breakeven prices that can only be calculated using a pricing model, such as the Black-Scholes option pricing model, since the two options do not expire on the same day. The same applies to the strategy’s maximum profit, which must be estimated in the same way. However, the maximum loss is known, since it corresponds to the net debit incurred to implement the strategy.

An investor interested in implementing this strategy could purchase call options with a $105 strike price expiring on October 18, 2019, at a price of $3.10 per share, and write call options with a $105 strike price expiring on September 20, 2019, at a price of $2.15 per share. The following table shows the cash flows for a position of 10 contracts.

Table 1: Calendar Spread Strategy Using Call Options on CCA

As Table 1 shows, the calendar spread strategy using call options can be implemented for a net debit of $950. This also represents the strategy’s maximum loss, which the investor could incur.

Graph 2: Profit and Loss Diagram for the Calendar Spread Strategy Using Call Options on CCA

Source :

Graph 2 above illustrates the profit and loss diagram for the calendar spread strategy on a position of 10 contracts (10 call options purchased and 10 call options sold). The calendar spread strategy using call options takes advantage of the relative stability expected in the price of CCA over the next few weeks. The position will be profitable as long as the stock remains within the two breakeven prices, which we have estimated at $101.99 and $108.45. Otherwise, the position will incur losses that cannot exceed the net debit of $950. The estimated maximum profit[1] of $1,186 will be realized if, upon expiration of the call options written (on September 20, 2019), the price of CCA is exactly $105 (the strike price).


There are three ways to manage this strategy. The first is to maintain the strategy until the September 20 expiration, and accept the result on that date. The second is to respond to changes in the stock price as they occur over the coming weeks. In the event of a significant breach of one of the two breakeven prices, the position could be reassessed to determine whether it is better to hold on to it or to liquidate it and cut one’s losses. The third approach becomes available if CCA’s price falls far enough that it becomes possible to buy back the options written for 10% to 20% of their initial price. The investor would then be holding call options expiring in October at a lower price, and be well placed to benefit from any increase.

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.

[1] To estimate the maximum profit, the value of the October call options must be calculated using the Black-Scholes pricing model at the September option expiry date. This value is then compared to the initial debit of $950 for different values of CCA. In this way we obtain the profit and loss diagram, with the two points of intersection with the abscissa representing the strategy’s breakeven prices.

The 12th annual Options Education Day in collaboration with the Options Industry Council (OIC) will take place in Toronto on September 14, 2019 at the Westin Harbour Castle. Seats are limited, so sign up before August 19 for the early bird pricing! To learn more:

Martin Noël
Martin Noël


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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