Explanation:
A calendar spread uses options with the same strike but different expirations.
At the time the shorter-dated option expires, the strategy is usually most profitable when the stock price is near the strike price because:
This is true for both call and put calendar spreads when the strike is ATM.
Therefore, the most profitable scenario is:
$20 strikeSo the correct answer is D.
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Q-184.4. Two traders each employ CALENDAR SPREAD trades with identical shorter-dated and longer-dated maturities: Trader C employs a calendar spread with a three-month and a nine-month call option, while Trader P employs a calendar spread with a three-month and a nine-month put option; for all options, the strike are at $20.00 which is at-the-money (ATM). When the shorter-maturity options expire in three months, which scenario is most profitable (profit net of initial cost) to the traders?
A
For both traders, if the stock is well ABOVE the $20 strike
B
For both traders, if the stock is well BELOW the $20 strike
C
For the trader using calls, if the stock is well above $20; for the trader using puts, if the stock is well below $20
D
For both traders, if the stock is near, or equal to, the $20 strike