Calendar Spread

The calendar spread is one of the most basic and easy to understand option strategy.

With the calendar spread we are ‘selling time’ – or to be more specific, we are selling an option that has time premium – with the intention to allow that time premium to melt away as time passes – leaving us with a profit.

To protect ourselves from a huge move in the underlying we are trading – we also purchase an option – usually at the same strike as the option we are selling – and the option we are purchasing is an outer month – or an option with more time left in it before expiration.

Calendar Spread – Example

For example – let’s say we are going to place a calendar spread on our favorite stock XYZ. XYZ has been trading in a range for awhile and we expect it to continue doing so – making it a good candidate for a calendar spread (remember, we want to choose an underlying that we expect to to stay somewhat within it’s range).

So, with XYZ trading at $40.00 – we sell one August 40 strike call (in this example August is the month we are in and there is about 3 weeks left to expiration). At the same time we sell the August option, we purchase an October 40 call option as protection.

As long as our stock XYZ stays close to where it is trading at now – over time, the 40 strike option will lose value day by day at a rate faster than the October 40 call. This difference in decay rate is what will give us our profit.

Calendar Spread – Rinse and Repeat

And – if things go as planned and XYZ does stay close to the 40 dollar strike price – and we DO wind up taking a profit on the position – once August expiration comes around we can the evaluate the market / XYZ stock and decide if we wish to do the same thing again – only this time, since we already own the October 4o call option, all we will need to do is sell the September 40 call with the goal of milking another months time decay.

To learn more about this strategy – as well as other ways to play the calendar spread such as diagonal calendars, reverse calendars, double and triple calendars spreads and more, be sure to join our FREE option income trading email newsletter by CLICKING HERE