question about Calendar Spread

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Schweser Note says all spread strategies have limited upside and limited downside. But I think calendar spread has unlimited upside and downside.
Say for example, an investor sells a 15-day call and buys a 45-day call. If the first call is not exercised after 15 days, then the calendar spread can be seen as a single long call, which has unlimited upside. If the second call is not exercised after 45 days, the the calendar spread can be seen as a single short call, which has unlimited downside. So, unlike bull spread and bear spread, calendar spread should have unlimited upside and downside.
Is that correct?
 
Hi.
To be precise, no.
If you leave your 15-day short call expired worthless, you’ll have a 30-day long call. If you’re assigned on expiry, you’ll have 30-day synthetic put. In both cases your calendar ceases to exist in 15 days, and after that you’ll have a clearly different position.
However, I wouldn’t say a long calendar has a limited downside. You may have a spike in the volatility near end and a mild rise in the far end, so you’ll loose due to this asynchronous vol rise. Theoretically, this asynchrony may lead to the limitless difference in option prices.
 
Kotausi_77 wrote:
Hi.
To be precise, no.
If you leave your 15-day short call expired worthless, you’ll have a 30-day long call. If you’re assigned on expiry, you’ll have 30-day synthetic put. In both cases your calendar ceases to exist in 15 days, and after that you’ll have a clearly different position.
However, I wouldn’t say a long calendar has a limited downside. You may have a spike in the volatility near end and a mild rise in the far end, so you’ll loose due to this asynchronous vol rise. Theoretically, this asynchrony may lead to the limitless difference in option prices.
Click to expand...
Still do not understand. If I leave 15-day short call expired worthless, I’ll have a 30-day long call. Long call has unlimited upside potential, right?
 
Right.
A call has an unlimited payout. A calendar doesn’t.
The life term of your calendar extends just for 15 days, not for 45.
 
Kotausi_77 wrote:
Right.
A call has an unlimited payout. A calendar doesn’t.
The life term of your calendar extends just for 15 days, not for 45.
Click to expand...
OK. Let me give you an extreme case.
Say for example, I sell a 15-day call with exercise price 15 for $10 and buy a 45-day call with exercise price 15 for $20. The initial debit amount is $10. The current stock price is $15. The call is at the money at initiation.
Scenario 1: 15 days after, the stock price falls to $14. The short-term call will not be exercised because it is out of money. Then 30 days after, the stock price rises to 1 million dollar. Then I will exercise the long term call because it is deep in the money. I can buy the stock at $15 and sell at 1 million dollar. In this case, the gain after 45 days should be: 1 million dollar - $15 - $10. This can be seen as unlimited potential gain, because it is possible that stock price can rise extremely high after 45 days (In theory, it is possible).
Scenario 2: 15 days after, the stock price rises to 1 million dollar. The short-term call will be exercised because it is deep in the money. I have to buy the stock at 1 million dollar and sell the stock to short term call buyer for $15. Then 30 days after, the stock price falls to $14. Then I will not exercise the long term call because it is out of money. In the case, the loss after 45 days should be: 1 million dollar - $15 - $10. This can be seen as unlimited potential loss, because it is possible that stock price can rise extremely high after 15 days.
 
I fully understand that, but we’re talking about a calendar, not a naked long / short.
Should your near leg expire / exercise, the calendar will fall apart, and you will remain with a naked option position. You may build another calendar or close the living position, but your calendar will always die one the 1st leg dies.
 
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