Calendar Call Spread

| December 8, 2011 | 0 Comments

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

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.