Beating The Heat In The Gold Miners Market

September 09, 2010


Maximum Profit

At the expiration of the October call, the position's maximum profit would be realized if GDXJ trades at the $34 strike price. If GDXJ is above this level, the expiring option would still have some intrinsic value; if GDXJ was lower, then the November option wouldn't be worth as much. Once the October call expires, you're left with a long call position that has an unlimited profit potential on an up move.



If the October call goes off the board, the long November call's expiration breakeven would be $34.55—equal to the option's strike price plus the net premium paid. During the life of the October call, however, the spread could actually break even at a different price level owing to the options' implied volatilities and how their time decay rates fluctuate.



An increase in the options' implied volatilities would positively affect the spread. Volatility increases most dramatically in a downdraft with longer-term options having greater sensitivity.


Bottom Line

A calendar call spread can be an ideal way to acquire shares when a near-term decline in share prices is anticipated. Simply put, it affords investors a way to turn overheated call premiums into a cool tool.


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