Calendar Spread Option Trading Strategies
Horizontal time spread is an options strategy which is created by purchasing and writing two options on the same asset stock or index and strike prices but have different expiration dates. This horizontal strategy is most known as Calendar spread because there are options with different expiration dates. This is a neutral strategy and used in neutral markets.
Profits result only if the underlying price of stock or index does not move to lot or only moves in a smaller range. If the stock rises or drops or goes up a lot, you will not make profits because of the volatility and movements of the underlying asset.. This is not a risk free option strategy, but it does have low risk. You will only lose what your debit amount has been and nothing more. Horizontal spread options strategy makes profit from the difference of option premium decay or the difference of implied volatility. Options which is near month expires will lose its value very fast. On to other hand, option which is farther month from expiring will lose its value slowly. Traders will implement to calendar spread by buying option which is farther out and selling a near month.
After some time they will review the position by buying the option they previously sell and selling the option they previously buy. This is also called spread TRADING. Investors can buy call options or buy put options with this strategy. But I prefer using put options because it is cheaper. I will give you an example. Share of a stock XYZ are trading at $50 . To create a calendar spread, you want to buy September $50 call and sell August $50 call. The September call will COST you $6 and August call will give you $4. The $2 spread is the total cost of the strategy. For this strategy to work, you will want August call to lose its VALUE to faster than September call.
In July the options might look like this. August call will worth $1 and September call will worth $4. Your spread will will increase to $3. You profit will sees the spread difference which is $1. In order to work the underlying stock price must remain stable. Any drop or rise will affect the Time VALUE and option price. Calendar spread sees used to make monthly income and that’ s why it is called income strategy. You don’ t need the stock to move to be successful.
For best candidate this strategy looks for channeling or sideways stocks. Those stocks tend to move in a small range. Here are some tips when choosing the stock: Don’ t choose volatile industry like technology or commodity companies. Don’ t have earning release in the coming months. For the news or the their website for possible take to over or mergers.