CHAPTER 12

Calendar Spreads

Calendar spreads, sometimes called time spreads or horizontal spreads, are the most versatile option strategy available in that they can be bullish, bearish, or neutral, but option traders tend to use them less than they should. Calendar spreads can be neutral, meaning they maximize profit if the underlying goes nowhere; they can be mildly bullish, making money if the underlying appreciates slightly; they can be very bullish, losing money if the underlying sits but generating significant profits if the underlying rallies; they can also be bearish in the same way they can be bullish, mildly so or aggressively.

Calendar spreads are underused, particularly by newer option traders, because the risk/return or payoff chart is a little more difficult to understand and additional action is generally required when the first option expires. However, there are few option structures that take advantage of option math and the phenomena we’ve discussed as well and as clearly as calendar spreads.

In executing a calendar spread, you buy a longer-dated option and sell an otherwise identical option that expires sooner. Since you are long the longer-dated, more expensive option and short the shorter-dated, less expensive option, you are long the calendar spread. Selling the longer-dated and buying the shorter dated would be a short calendar spread.

Buying a calendar spread requires payment of net premium, since the longer-dated option is always going to be more expensive ...

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