‘‘In sum, a big move in the underlying market or a decrease in implied volatility will help a short calendar spread, whereas a stable market or an increase in implied volatility will help a long calendar spread. Thus, calendar spreads are sensitive to movement of the underlying but also sensitive to changes in implied volatility.’’
Im confused with the stable and big move in underlying statement. In long CALL calendar, a big move in underlying (significant decrease in price) can further improve the profit after the near term option expires right? So why does a stable market benefit but not a big move?
I think we are normally analysing the calendar spread when both options are still live.
With a long calendar spread this is going to cost you are the start.
Premium on short call less than premium on long call.
This premium difference is our maximum loss/
Ideally we would like the short term to expire worthless and be left a long call - we can keep or sell for more than the initial net cost of the trade.
If the short term price spikes upwards the short term option could expiry in the money meaning a payout offset by the gain in the long dated call. But we still most likey by out of profit due to our initial premium cost.
If the underlying share price goes to zero short term. Both options probably become worthless and we are losing money as the trade cost is premium to put on.
I think you find the calendar spread cheet sheet in this page useful.