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Calender Spread Strategy


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Dear David,

John Hull in his "Options, Futures and Other Derivatives"(7th edition) (page 229) said that for a calender spread made up of call options, " if stock price is very high when short-maturity option expires, the investor makes a net loss that is close to the cost of setting up the spread initially" because "the short-maturity option costs the investor St- K,and the long-maturity option is worth close to St-K".

1)The part highlighted in red seems contradictory with his earlier argument that call option value C >=St -K, which can be explained by the existence of option time value. And if this is valid, it logically follows that the net loss in this scenario should be initial set up cost - time value of the long maturity option. Can I know your view on this?

2) I think this should also implies that time value of the long maturity option is highest when stock is around K but is getting smaller when stock is getting larger and larger than K. (since profit pattern of this strategy is such that profits peak at around the strike price level, not higher level)

3) What's more, I'm wondering if the Calender spread strategy works for American options as well?

4) What about a calender spread strategy made up of call options on a large dividend-paying stock, where the short-maturity option expires before the dividend ex-date but the long-maturity option expires after the dividend ex-date? I have this question because I read from one of your material that "A European call option can be worth less than its intrinsic value. due to effect of large dividend payout during option life."

Thank you for your help!