Example: XYZ stock is trading at $50
Outlook: You are neutral on XYZ stock short term.
Possible strategy: Buy Time Spread to take advantage of short term time decay.
Sell one June 50 strike call at $2.50
Buy one July 50 strike call at $3.75
Net Debit $1.25
- Maximum Profit = Long call value at near term expiration - Net Debit
- Maximum Loss = Net Debit paid for spread $1.25
In SUMMARY: This spread will be profitable if XYZ stabilizes to the at-the-money strike at June expiration. Maximum profit depends on the value of the long call at near term expiration. Maximum loss is equal to the debit paid for the spread.