Calendar Spreads in Options Trading: What Is It & How To Trade?

With this strategy, you open two call or put positions with the same strike prices. Basically, you are selling a longer-term option and buying a shorter-term one. Since the longer-term option has a higher premium, your net premium will be a credit. The reverse calendar spread strategy is focused on profiting from the price difference between the strike price and the asset price.

Note that the calendar spread can be created by either using the Call options or the Put options. The strategy is created by selling a Call Option of nearer expiry (December 8, 2022) and buying a Call of further expiry (December 29, 2022). The rationale for the trade is to create a price-neutral strategy that generates money when the difference between the two futures shrinks. There is also a third type of spread that is increasingly gaining traction. Here the trader selects the two option legs from different strikes and different expiries. The stock market offers virtually any combination of long-term opportunities for growth and income, as well as short-term investments for trading gains.

Reverse Calendar Spread With Calls and Puts

The short call may be purchased and resold at a lower strike price to collect more credit and increase profit potential. Ideally, the stock still closes below the short option, so it expires worthless. The long call option may have extrinsic value remaining to help reduce the loss or potentially make a profit. The initial cost is the maximum risk for the trade if the short call option is in-the-money and/or both options are closed at the front-month expiration.

Options are commonly used by cryptocurrency traders to diversify their portfolios and hedge positions. For successful options trading, you typically find a strategy to predict the direction the asset is likely to move. The optimal strategy should suit you in terms of risk/return ratio and satisfy other parameters set by you. A double calendar spread requires the creation of two calendar spreads. A put-based calendar spread is created below the current market, and a call-based calendar spread is created by selecting expiries above the current market. In this example, the capital requirement is Rs 26,998, nearly the same as a debit or credit spread created by using options one strike price apart.

Reverse Calendar Spread With Puts

As calendar spreads make money from time and volatility, they are normally created by using at-the-money (ATM) options. A calendar spread is an options strategy created by simultaneously entering a long and a short position on the same underlying but with different expiries. Suppose Bitcoin is trading at $20,000, and the trader expects the price of BTC to remain stable over the next 3 months and rise over the next 3-6 months. The trader buys a call option with an expiration date of 6 months and an exercise price of $20,000 for a $1,000 premium. They simultaneously sell a Call option with an expiration date in 3 months and the same exercise price for a $500 premium.

• A debit will be paid to enter the position because the longer-dated option will be more expensive.
• Call calendar spreads can be adjusted during the trade to increase credit.
• If the stock price is below the short call at expiration, the contract will expire worthless.
• Put calendar spreads can be adjusted during the trade to increase credit.
• It is advantageous to initiate calendars where the front-month option has higher implied volatility than the back-month option.
• This means that the trader can only lose the amount they paid to initiate the strategy.

Then, they open a new short position with a lower strike price put option that expires at the same time as the long put option. Therefore, the new put option will have a lower strike price, reflecting the trader’s bearish preference. A long double calendar spread requires purchasing the farther expiry month options and selling the closer expiry options. A short calendar spread requires selling the farther-dated expiry month and buying the nearer expiries.

Method #2: Roll Out In Time

In other words, the trader may be required to have less money in their trading account to execute a calendar spread than they would for other options strategies with a similar risk profile. That is why long options have a negative theta (they lose value with time for buyers), while short options have a positive theta (their value increases for sellers as time goes by). The profitability of a calendar spread depends mainly on the difference in the time decay between the two options. Changing volatility is the biggest contributor to creating this uncertainty. If implied volatility increases significantly early in the near-term expiration, the spread between the two contracts will decline. After the near-term expiration, the more implied volatility, the better.

• A diagonal spread is constructed by purchasing a call/put far out in time, and selling a near term put/call on a further OTM strike to reduce cost basis.
• I’m going to use a front month vertical adjustment strategy to correct my Delta.
• At the near-term expiration the payoff diagram slightly resembles an inverted V. After the near-term expiration, if the long call option is held, the payoff diagram is the same as a long call.
• A double calendar spread is a debit strategy that has positive vega and hence, is created in a ‘low-volatility environment’.
• Legging out of a call calendar spread can increase the risk beyond the initial debit paid but creates the highest profit potential.

In general, calendar spread can be applied not only to options but also to futures trading. The strategy also goes by the names of “horizontal” and “time spread”. It takes advantage mainly of the time decay (or theta decay) and the increased implied volatility (IV). Effectively, a double calendar spread combines a short strangle in the near expiry and a long strangle in the far expiry.

How to set up a Put Calendar Spread

Recall that the net debit is the cost of implementing the strategy, which is the difference between the amount paid for the longer-term option and the amount received from the sale of the short-term option. For example, if a call calendar spread was entered at $50, and the underlying stock has dropped to $40 before the first expiration, the short call could be bought back and resold at $45. For example, if a put calendar spread was entered at $50, and the underlying stock has increased to $60 before the first expiration, the short put could be bought back and resold at $55. A put calendar spread is created by selling-to-open (STO) a short-term put option and buying-to-open (BTO) a put option with a later expiration date. To implement a calendar spread options strategy, traders can use either “call” or “put” options, depending on their outlook on the underlying asset’s direction.

The profit potential is unlimited if the short call expires worthless, and the underlying stock price and/or implied volatility has a significant increase. The short put option of a put calendar spread can be rolled higher if the underlying stock price rises. The short put may be purchased and resold at a higher strike price to collect more credit and increase profit potential. Ideally, the stock still closes above the short option, so it expires worthless. The long put option may have extrinsic value remaining to help reduce the loss or potentially make a profit.

A more neutral outlook is typically expressed with a call calendar spread than a put calendar spread because of the greater time value inherent in call options relative to put options. The position has a maximum loss defined by the cost to enter the trade. If the underlying stock price is below the short put at expiration, the long put may be exercised to cancel out the assignment of the long shares. For example, suppose a stock is trading at or below $50, and an investor believes the stock will stay below $50 in the near future.

A diagonal spread is constructed by purchasing a call/put far out in time, and selling a near term put/call on a further OTM strike to reduce cost basis. However, the long call’s value may increase or decrease after the first expiration, depending on the price movement of the underlying security. If the short call is in-the-money at the first expiration and the long call is not sold simultaneously, the maximum risk may exceed -$200 if the stock subsequently reverses before the second expiration. However, the long put’s value may increase or decrease after the first expiration, depending on the price movement of the underlying security. If the short put is in-the-money at the first expiration and the long put is not sold simultaneously, the maximum risk may exceed -$200 if the stock subsequently reverses before the second expiration. To sell a calendar spread, you need to have a trading account with an options broker.

In this case, we would have to pay a debit to roll up the short strike to accommodate the price movement. When the calendar is constructed, as in this example, exiting one or two weeks prior to the short strike expiration happens to be about 30% to 40% of the duration to the long strike expiration. The only loss is the cost paid by the investor to create the calendar. This makes sense because the short option obligates the investor to purchase TSLA at $610 if the price is below $610 at short option expiration. Such a strategy can be used to make a profit when the price of the underlying asset moves up or down significantly. Although, in general, breakeven points can be roughly calculated using the formulas above, certain market conditions, such as changes in volatility, may cause the breakeven points to change subsequently.

What I want to do is set the trade to try to take advantage of the market being like a magnet and coming back to these prior basing areas, the consolidation zones. Rolling it there would be equivalent to closing out the entire position. On the week of expiration with only four days left, we roll again further out in time.

Therefore, in general, their calculation can be quite complicated, and the accuracy of the calculations can vary greatly depending on market conditions and the models used. Nonetheless, there is a theoretical way where we can assume all things remain equal to calculate the maximum loss possible. Here with the passage of time, the near period option will start decaying at a faster rate than the farther expiry option, provided the underlying does not move too much. This is a Debit spread strategy, as the value of the premium collected is lesser than the premium paid. All I simply did was move half of these strikes down to cut that Delta  more towards neutral or reduce the positive Delta.

Why is too much Delta bad for the trade?

In this case, the trader will receive the maximum profit if the BTC price starts to grow after the expiration of the nearest option. However, there are strategies that do not require you to predict the direction of the market. The nuances, mechanisms, key points, and application of this strategy will be covered in this article. This strategy calendar spread adjustments is normally created when the trader feels the market is going to remain range-bound, or there will be a slight bullish or bearish movement. Because of a drop in price, implied volatility numbers had changed, and the change was favorable for us. The IV of our long April calls had increased more than that of our short March calls.

Options, futures, and futures options are not suitable for all investors. As with call spreads, in case of forecast alterations, the calendar put spread can be converted into a bearish put option. That is, the trader closes a position in a short put option with a nearer expiration.