Delta of Calendar Call Spread
Quantitative Finance
Level
3
The stock trades at 20. You are long the 22 call expiring in 1 month and short the 22 call expiring in 3 months. What is your delta position?
Long delta, the longer term OTM call has less delta
Short delta, the longer term OTM call has more delta
Short delta, because there are short calls
Long delta, because there are long calls
Delta neutral, the calls have the same delta
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1 solution
As a general rule, in-the-money options will move more than out-of-the-money options, and short-term options will react more than longer-term options to the same price change in the stock.
And as expiration nears, delta for out-of the-money calls will approach 0 and won’t react at all to price changes in the stock. That’s because if they are held until expiration, calls will either be exercised and “become stock” or they will expire worthless and become nothing at all.
The long 22 call is OTM and expiring soon, therefore, its delta is near 0 . While the short 22 call expiring in 3 months still keeps its short (negative) delta of absolute value larger than 0 . Therefore, the net delta position is s h o r t .