Calendar Option Spreads
Call Calendar Spread – Buy one long term Call with 90 days or greater until expiration and sell one short-term Call with 45 days or less until expiration at same strike price in stable markets. The objective of this trade is to capture time decay since the sold Call will lose value faster than the purchased Call. Repeat sale of another short-term option if time permits on long term option to capture additional time premium. Hold long option if market looks ready to break out in an upward direction.
Entry Rules
Stocks expected to stay in a trading range.
Implied Volatility Skews of sold Call at least 15% greater than purchased Call.
Buy as much time as you can while keeping the net debit of the spread under $2 per contract.
Exit Rules
Hold position until expiration week of the sold option.
If the options are ITM: roll forward to the next month - buy back the Call option you sold and sell the next month’s Call option at the same strike price.
If the options are OTM: let the current month options expire worthless. Sell the next month’s option on the Monday following expiration.
If the options are ATM you have several options:
- Sell the option you purchased to close out the spread.
- Roll forward to continue the position,
- Convert the position to a Bull Call spread or Bear Call spread.
(See these strategies to determine if one of these options makes sense)
If the option you purchased is entering its final month before expiration, close the position, or keep the Call or convert to a Bull Call spread if you are now Bullish on the underlying asset.
Profit & Loss Calculations
Maximum Risk – Limited to the net debit paid for the spread
Maximum Profit – Unlimited at short-term Call expiration
Breakeven – Strike price + net debit paid after short-term Call expiration
Put Calendar Spread – Buy one long term Put with 90 days or greater until expiration and sell one short term Put with 45 days or less until expiration at same strike price in stable markets. The objective of this trade is to capture time decay since the sold Put will lose value faster than the purchased Call. Repeat sale of another short-term option if time permits on long term option to capture additional time premium. Hold long option if market looks ready to break out in an upward direction.
Entry Rules
Stocks expected to stay in a trading range.
Implied Volatility Skews of sold Put at least 15% greater than purchased Put.
Buy as much time as you can while keeping the net debit of the spread under $2 per contract.
Exit Rules
Hold position until expiration week of the sold option.
If the options are ITM: roll forward to the next month - buy back the Put option you sold and sell the next month’s Put option at the same strike price.
If the options are OTM: let the current month options expire worthless. Sell the next month’s option on the Monday following expiration.
If the options are ATM you have several options:
- Sell the option you purchased to close out the spread.
- Roll forward to continue the position,
- Convert the position to a Bull Put spread or Bear Put spread.
(See these strategies to determine if one of these options makes sense)
If the option you purchased is entering its final month before expiration, close the position, or keep the Put or convert to a Bear Put spread if you are now Bearish on the underlying asset.
Profit & Loss Calculations
Maximum Risk – Limited to the net debit paid for the spread
Maximum Profit – Unlimited at short-term Put expiration
Breakeven – Strike price - net debit paid after short-term Put expiration
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