Calendar Call Spread
Calendar call spreads, also known as long time spreads are advanced option strategies.
This strategy involves buying a calls or put options. It’s established by selling one option at a specific strike and month. And buying another option with the same strike, but with a longer dated expiration month.
It’s not as complicated as it appears.
For example…
You sell a Microsoft December $25 strike call option for $0.50 a share ($50.00). After, you buy a Microsoft February $25 strike call options for $1.15 per share ($115).
Just about all of the time, when you’re buying an option further out in time, you’re going to pay more money than for a shorter dated option. Hence, long calendar spreads are established for a debit.
Meaning, you’re paying for the position.
So, why would an individual use this strategy?
Calendar spreads are often used to take advantage of an options volatility. In a normal market, volatility is higher the closer an option is to expiration.
Let’s take a closer look… at the first expiration.
At the first expiration, Microsoft is trading at $24 a share. So, it’s below the December (front month) strike price of $25 a share.
The fact is… this is what you’re looking. The December option (front month) expires worthless, giving you a $0.50 a share profit. Now you own your remaining Microsoft February $25 call option for $0.65 instead of $1.15 per share.
Another piece of good news… when putting on any option strategy for a debit, it’s automatically your maximum risk. You can’t lose more than you spend. Don’t ever forget this.
Category: Options Trading Strategies