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Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks by W. Edward Olmstead - Professor of Applied Mathematics McCormick School of Engineering and Applied Sciences Northwestern University

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The objective of a calendar spread trade is to capture the time value in a front-month option, which will decay faster than the time value in a more distant month option. To exploit this difference, it is generally wise to initially have at least one month between the expiration of the long option and that of the short option. This allows for at least one new calendar spread to be established after the first expiration date.

A calendar spread is only profitable if the stock price at the options expiration date is within a fairly narrow range. The risk graph of Figure 12-1 is fairly typical for a calendar spread. As seen in that example, the range of profitability at the June expiration was $33 to $38. This means that the price of XYZ ...

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