Calendar Spread Trading Strategy

This trade is designed to allow the trader to potentially benefit from the difference in price between the two expiration dates.

Calendar spread trading strategy. About calendar call spread. Set up of a calendar spread trading strategy. The calendar spread strategy would give a payoff resembling this graph.

A calendar spread is a trading strategy in that the trader buys and sells two contracts with different expiration dates of the same financial instrument at the same time. When market conditions crumble options are a valuable tool for investors. Let s take a look at an example.

A calendar spread is a strategy involving buying longer term options and selling equal number of shorter term options of the same underlying stock or index with the same strike price. The calendar call spread is a neutral trading strategy that involves buying and selling of call options. This includes buying a long term call option and simultaneously selling a short term call option by offering the same strike price.

Selling short 1 option front month buying long 1 option back month both options should be of the same type i e. Generally if trading a bullish spread i would use calls and for a bearish calendar spread i would use puts. This type of trading strategy can go by many names calendar spread horizontal spread diagonal spread time spread covered calls with leaps bull call leaps etc.

The calendar spread therefore has some similarities to the covered call strategy in which you own a stock and then sell the atm call option for that stock against your long shares. But the core principle of this approach remains the same capitalizing on the fact that an option s time value decays at a substantially higher rate on short term options than it does on long term options. Either put or call.

A calendar spread is a long volatility trade so tends to benefit from rising volatility after the trade is placed. It is used when a trader expects a gradual or sideways movement in the. A calendar spread is a strategy involving buying longer term options and selling equal number of shorter term options of the same underlying stock or index with the same strike price.