Description:
This is a horizontal spread consisting of a long position in a close to ATM call option with TTM T′ and a short position in another call option with the same strike price K but shorter TTM T < T′. This is a net debit trade. The trader’s outlook is neutral to bullish. At the expiration of the short call option (t = T), the best case scenario is if the stock price is right at the strike price (ST = K).
At t = T let V be the value of the long call option (expiring at t = T′) assuming ST = K
If at the expiration of the short call option the stock price Sstop−loss ≤ ST ≤ K, where Sstop−loss is the stop-loss price below which the trader would unwind the entire position, then the trader can write another call option with the strike price K and TTM T1 < T′. While maintaining the long position in the call option with TTM T′, the trader can generate income by periodically selling call options with shorter maturities. In this regard, this strategy resembles the covered call strategy.
