Intro to Trading Calendar Spreads
The calendar spread option strategy allows traders to profit in any market climate using clearly defined risk. Here's how to plan and execute the strategy, as well as key risk factors to consider, writes Jeff Kohler of Investopedia.com.
When market conditions crumble, options become valuable tools to traders and investors alike. While many new traders are confused by the variety of option strategies, there are many simple option strategies that can be used to help reduce the risk of market volatility.
In this article, we are going to examine the many uses of the calendar spread and discuss how to make this strategy work during any market climate.
Getting Started in Calendar Spreads
Calendar spreads are a great way to combine the advantages of spreads and directional option trades in the same position. Depending on how you implement this strategy, you can have either:
- A market-neutral position that you can roll out a few times to pay the
cost of the spread while taking advantage of time decay, or
- A short-term market-neutral position with a longer-term directional bias that is equipped with unlimited gain potential
Either way, the trade can provide many advantages that a plain old call or put cannot provide on its own.
Long Calendar Spreads
A long calendar spread, which is often referred to as a 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 different expiration months.
In essence, you are selling a short-dated option and buying a longer-dated option.