O'Reilly logo

Essential Option Strategies by J. Kinahan

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

Chapter 14Calendar Spreads

The calendar spread is a strategy that involves buying an option and selling another with the same strike price but in a different expiration month. Also known as a time spread or horizontal spread, the strategy is sometimes initiated when an investor expects the underlying to move in a range around the strike price over the life of short-term contract and then possibly make a directional move thereafter.

The call calendar spread is the sale of a call option and the purchase of another call at the same strike price with a more distant expiration. You can think of it as a combination of a long call and a short call and is a debit transaction because the cost (or premium) of the long option is greater than the premium collected for writing the short call. Calendar spreads are designed to take advantage of time decay as the front month will decay faster than the next month. They also seek to take advantage of increasing levels of volatility.

A put calendar spread is the purchase of a put and the sale of a put at the same strike but a closer expiration month. Both put and call calendar spreads seek to benefit from the nonlinear nature of time decay and the fact that there is a tendency for shorter-term options to lose value due to time decay at a faster rate than longer-term contracts.

If the short option of the put or call calendar spread expires worthless, the strategy has the same risks and rewards as being long a put or long a call option. The investor ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required