Calendar Trading and Spread Option Strategies

Aug 29, 2022 By Triston Martin

If the market slumps, options are an excellent instrument for investors. Many investors are scared when they hear options; however, various options strategies are available to reduce the danger of market instability. The calendar spread is a great option to employ in any market conditions. Calendar spreads can be a fantastic option to combine the benefits of directional options and spreads trades within the same spot. Based on the way an investor utilizes using this method, they could take on one of the following scenarios:

  • A neutral market position that may be spread out multiple times to take care of the costs of the spread while taking advantage of the time decay
  • A neutral position short-term market that has an extended directional bias with unlimited potential for gain

Long Calendar Spreads

A long calendar spread is often known as a time spread of the purchase and sale in a put option or the selling and buying of put options with the same strike amount but with different expiration dates.

In simple terms, if a trader sells a short-dated option and buys a longer-dated option, there will be a net charge to your account. Selling the short-dated option lowers the cost of the longer-dated option and makes the trade cheaper than purchasing the long-dated option in full. Since the two options expire at different times, the trade could take many forms as expiration times come and go.

There are two kinds of spreads for long calendars called put and call. There are advantages to trading puts calendars over the calendar that is called; however, both are accepted trades. Whether a trader makes use of puts or calls is contingent upon the mood of the investment vehicle. If the trader is bullish, they will purchase an annual Calendar call spread. If the trader is bearish, they will buy put spreads for the calendar.

A spread long in the calendar is a great strategy when you anticipate prices to be within the strike price by the end of the first-month option. This strategy is perfect for those traders whose current outlook is neutral. The best case scenario is that the short-dated option will expire and be void of cash. After that, the trader is left with a long-dated option position.

If the trader has an optimistic forecast, they could decide to trade a different option to the long position and move into a different spread. However, when the trader thinks the stock will begin to change direction in line with the long-term forecast, they may put the long position out of position and reap rewards of limitless profits.

Trading Tips

Pick Expiration Months for a Covered Call

If you trade a spread calendar, the strategy must be considered the same as a cover call. The only distinction is that an investor doesn't hold the stock in question; however, the investor has the right to purchase the stock. When a trade is treated like one of the covered calls, the trader can quickly choose the months of expiration. When deciding the date for this option's expiration, traders should take a minimum of 2 to three months ahead based on their prediction. When choosing the short strike, it's always recommended to purchase the option with the shortest date to be available. The options will lose value quickly and can be rolled out monthly for the contract duration.

Leg Into a Calendar Spread

If traders own put or call on investment, they can trade an option in this particular position and convert it into the calendar spread anytime at any time. For instance, if a trader holds calls on a certain stock and has experienced a significant shift to the upside, it may have recently slowed down. An investor can sell a call on this stock if they're neutral for the short term. Investors can utilize this method of legging in to stay out of the dips in an upward-trending stock.


Limited Upside in Early Stages

Calendar trading is a risky investment as long as both legs are involved. But, when the short option is over, the long position is a guaranteed source of profit. At the beginning of this transaction, it's an appropriate neutral trading strategy. If the price rises more than expected, it could result in only a few gains.

Be Aware of Expiration Dates

The expiration dates also carry a possibility of risk. When the expiration date of the short option nears the date, it is necessary to take action. The contract becomes void if the option expires without funds (OTM). When the contract is in funds, the trader needs to look into purchasing the option back at the market rate. Once the trader has taken action by using his short-term option, he should decide if they want to take the position on a roll.

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