Trading Calendar Option Spreads – Using Time Decay To Your Advantage

calendar option spreads

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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.

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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.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.