The calendar spread options strategy Here is one way to capture opportunities created by volatility. The goal is to profit from a neutral or directional stock price move to the strike price of the calendar spread with limited risk if the market goes in the other direction.
What is a calendar spread? A calendar spread typically involves buying and selling the same type of option calls or puts for the same underlying security at the same strike price, but at different albeit small differences in expiration dates. This type of strategy is also known as a time or horizontal spread due to the differing maturity dates.
A calendar spread is an options or futures spread established by simultaneously entering a long and short position on the same underlying asset at the same strike price but with different delivery months. It is sometimes referred to as an inter-delivery, intra-market, time, or horizontal spread. Key Takeaways A calendar spread is a trading strategy for futures and options to minimize risk and cost by buying two contracts or options with the same strike price and different delivery dates.
A typical long calendar spread involves buying a longer-term option and selling a shorter-term option that is of calendar spread option same type and exercise price.
For example, you might purchase a two-month strike price call and sell a one-month strike price call. This is a debit position, meaning you pay at the outset of the trade. Calendar spreads are for experienced, knowledgeable traders In technical terms, the calendar spread provides the opportunity to trade horizontal volatility skew different levels of volatility at two points in time and take advantage of the accelerating rate of theta time decaywhile also limiting exposure to delta the sensitivity of an option's price to the underlying asset.
The goal of a calendar spread strategy is to take advantage of expected differences in volatility and time decay, while minimizing the impact of movements in the underlying security. The objective for a long call calendar spread is for the underlying stock to be at or near, nearest strike price at expiration and take advantage of near term time decay. Depending on where the stock is relative to the strike price when implemented the forecast can either be neutral, bullish or bearish.
Calendar spread candidates You can use some of the tools that are available on Fidelity. Screenshot is for illustrative purposes only.
Significant movement in either direction in a short period may be costly because of the way the higher gamma the rate of change, or sensitivity, to a price change in the underlying security for delta affects short-term contracts.
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- The Options Industry Council (OIC) - Long Put Calendar Spread (Put Horizontal)
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Another risk to this position is early assignment when selling shorter-term contracts especially with callswhere the expiration date follows the ex-dividend date. If this is the case, the probability of assignment increases significantly. If assignment occurs prior to the ex-dividend date, the client will owe the dividend payment calendar spread option the account is now short shares, unless shares of the underlying security are already held in the account.
Description To enter into a long put calendar spread, an investor sells one near-term put option and buys a second put option with a more distant expiration. The strategy most commonly involves puts with the same strike horizontal spreadbut can also be done with different strikes diagonal spread. Outlook The investor is looking for either a steady to slightly rising stock price during the life of the near-term option and then a move lower during the life of the far-term option, or a sharp rise in implied volatility levels. If the stock remains steady or rises during the life of the near-term option, it will expire worthless and leave the investor owning the longer-term option. If both options have the same strike price, the strategy will always require paying a premium to initiate the position.
Managing a calendar spread It is also advisable to check for ex-dividend dates, as it is very important to understand assignment risk—especially for call spreads. You can adjust the spread as necessary to maintain the long position, while adjusting the strike price of the short contract along the way to give more delta exposure.
Calendar spreads with Fidelity A client needs at least a "level 3" option approval to implement this strategy. When the short-term expiration date approaches, you will need to make a decision: Sell another front-month contract, close the whole strategy, or allow the long-term call or put to stay in place by itself.
Calendar Spread Strategy - Weekly Option Selling Strategy
Next steps to consider.