Strategies for using Calendar Spreads options

Strategies for using Calendar Spreads options

When market collapse, trading through options become an important tool to investors. Mostly investors shiver by the name of the word “options”, there are other strategies which can be used to help lessen the risk of market volatility.

What is a calendar spread?

This strategy typically involves buying and selling the similar type of option (calls or puts) for the same underlying security at the same strike price, but at different expiration dates. For this reason this type of strategy is also called as a time or horizontal spread due varied maturity dates.

The long calendar spread usually done by buying a longer-term option and selling a shorter-term option of similar type and exercise price.

Calendar spread strategy main aim is to take the advantage of expected changes in volatility and time decay, while minimizing the impact of movements in the underlying security. The objective is for the underlying stock to be, nearest strike price at expiration and take benefits of near term time decay.

Calendar spread is a market neutral strategy generally meant for seasoned options investors that demand different levels of volatility in the bottom-line options at changing points in time, with restricted risk factors in either direction. The main aim is to make profit from a directional stock price movement to the strike price of the calendar spread with limited risk if the market goes in the other direction.

Depending on implementation of the strategy, investor can have either:

  • neutral position in the market that investor can roll out few times to compensate the cost of the spread with the advantage of time decay
  • Or, a short-term neutral position in the trading market having a long-term directional bias that is provided with unlimited gain potential.

Long Calendar Spreads

A long calendar spread, which is also called as time spread, is the buying and selling of a call option or the buying and selling of a put option of the same strike price but differ in expiration dates . In gist , Investor is selling a short-dated option and buying a longer-dated option. With result of a net debit to the account.

Long calendar spreads are of two types: call and put. There are benefits in trading a put calendar over a call calendar, but both are equally acceptable in terms of trading profit potentials.

This strategy is to work best when the investor short term sentiments is neutral and then he speculate prices to expire at the value of the strike price and trading expiration month.


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