Calendar Spreads are becoming more popular even though I don’t really favor them. It’s that not that they are a “bad” strategy, my trading style just favors others. Calendars are however a great tool to have in your portfolio and as part of your overall trading arsenal.
Why Use Calendar Spreads?
Calendars are a great alternative for traders who believe that a stock will remain in a relatively tight trading range and want to benefit from the power of time decay. The goal of any Calendar Spread is to take advantage of time decay. More specifically you want to exploit the more rapid rate of time decay in shorter term options.
The reason they called "calendar" spreads is because the strategy requires the buying and selling of options with different expiration months. The strategy can be built with all Calls or Puts. Generally speaking, if you use Calls then you are long-term bullish and vice verse with Puts.
Profit From Near Term Time Decay
Since time decay occurs faster for near month options than those other long-term options, the near term options lose their value faster while the far term options manage to retain close to the same value. At expiration, if the near term options are going to expire worthless, the trader can choose to hold onto the long-term calls/puts, and continue to potentially profit from any further move in the stock.
Setting Up A Calendar Spread
Rather than attempt to write out how to set up a Calendar Spread here, I decided to do a quick video in YouTube HD.
Have You Traded Calendar Spreads?
Add your comments below and share your experiences (good, bad, or the rare ugly) trading Calendar Spreads. If you have specific questions on my video or anything else ask them in the comment section as well.