Calendar Spread Assignment Risk

If a trader is bearish they would buy a calendar put spread.

Calendar spread assignment risk. If both legs are in the money at expiration you could still be assigned but since your other leg is in the money you can exercise that to collect max profit. While the long call in long calendar spread with calls has no risk of early assignment the short call does have such risk. When the market is in backwardation can be a good time to enter calendar spreads because the front month volatility is higher than the back month.

A calendar spread is a long volatility trade so tends to benefit from rising volatility after the trade is placed. Early assignment of stock options is generally related to dividends and short calls that are assigned early are generally assigned on the day before the ex dividend date. If the strike prices are also different then it s called a diagonal spread if i m not mistaken.

A calendar spread consists of buying or selling a call or put of one expiration and doing the opposite in a later expiration. The value of the calendar spread will decrease as the strikes move either deeper into the money at which point they will both trade at intrinsic value or if price declines as a debit position. The risk is most acute when a stock trades ex dividend.

When buying a call spread or put spread the risk of assignment is determined by how much of the spread is in the money. We talked about this already so won t go into to much detail here and while this doesn t happen often it can theoretically happen at any point during the trade. Some other risks associated with double calendar spreads.

In this regard choosing a short calendar spread is similar to choosing any strategy. The decision to trade any strategy involves choosing an amount of capital that will be placed at risk and potentially lost if the market forecast is not realized. The risk of a short calendar spread is still 100 of the capital committed.

If a trader is bullish they would buy a calendar call spread. Calendar spreads also known as time spreads are extremely versatile strategies and can be used to take advantage of a number of scenarios while minimizing risk.