12. Calendar Spreads
The focus of this chapter is on calendar spread trades, also known as horizontal spread trades or time spread trades. These trades work best on stocks or ETFs whose price moves within a reasonably narrow range. Volatile stocks that can move up or down 15 percent within the time frame of 1 month are generally not suitable for calendar spreads.
In a basic calendar spread, you buy a distant month option and sell a closer month option. Both options have the same strike price, which is typically selected to be the one nearest the price of the stock at the time the trade is initiated. When things progress well in a calendar spread, the short option ultimately expires worthless while the stock price remains essentially unchanged. ...
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