Calendar Spread Option Strategy

What are the characteristics of this option strategy?

A Calendar Spread Option Strategy (also known as a Time Spread or Horizontal Spread) is a type of option spread with a risk-defined vertical component and a neutral component. The trade consists of two options with different expiration dates but the same exercise prices or strikes. This strategy is long one option and short another with different expiration dates and at the same strike price. The goal of the strategy is to profit from no movement in the underlying asset and negative movement in the price of the near-expiry option. The strategy can also be used to take advantage of earnings and news announcements or to take advantage of price discrepancies between the two options.

Is this a bullish, bearish or neutral strategy?

The Calendar Spread Option Strategy is neutral. This means it will typically not benefit from the either bullish or bearish movement of the underlying asset. The strategy seeks to profit from discrepancies in option pricing between the long and short legs.

Is this a beginner or an advanced option strategy?

The Calendar Spread Option Strategy is a relatively advanced option strategy. This strategy does require some knowledge about options pricing, Greeks, and implied volatilities. While this strategy is risk-defined and typically has a good probability of profit, investors should be aware that the risk profile of this strategy is not suitable for everyone.

In what situation will I use this strategy?

The Calendar Spread Option Strategy is often used when an investor has a neutral view of the underlying asset but doesn’t want to expose himself to extreme volatility. This strategy can be particularly useful if the investor believes that the options pricing is inaccurate or doesn’t take into account all of the information available in the marketplace. Additionally, the Calendar Spread Option Strategy is often used when the underlying asset lacks significant volatility or direction.

Where does this strategy typically fall in the range of risk-reward and probability of profit?

The Calendar Spread Option Strategy typically falls in the range of low to moderate risk-reward with a high probability of profit. This strategy is typically a high probability of profit in that the risk profile is defined and limited.

How is this strategy affected by the greeks?

The Calendar Spread Option Strategy is affected by the greeks in that changes in the greeks can lead to changes in the profitability of the strategy. For example, changes in the levels of implied volatility can cause changes in the value of the spreads, and changes in time decay can have an impact on the profitability of the strategy.

In what volatility regime (i.e VIX level) would this strategy be optimal?

The Calendar Spread Option Strategy is typically most optimal in a low- to moderate- volatility regime. This is because the strategy relies on discrepancies in option pricing between the long and short legs. If volatility is too highly elevated, the strategy can lead to large losses due to exponential moves in the options pricing.

How do I adjust this strategy when the trade goes against me? And how easy or difficult is this strategy to adjust?

Adjusting the Calendar Spread Option Strategy when it starts to go against you is relatively easy as the risk profile is predetermined. Investors can adjust the strategy by either rolling the long option up or down in strike or adjusting the spread size. Adjusting the Calendar Spread Option Strategy is typically easy and should be done early in order to minimize potential losses.

Where does this strategy typically fall in the range of commissions and fees?

The Calendar Spread Option Strategy typically ranges from moderate to high commissions and fees. Most of the cost associated with this strategy is from entering or exiting the trades, as it typically involves buying and selling two options simultaneously. The commission costs of entering and exiting the strategy can add up quickly.

Is this a good option income strategy?

The Calendar Spread Option Strategy is not typically used as an income strategy. This strategy is typically used by investors looking to take advantage of discrepancies in pricing between options or who are looking to take advantage of incoming news or earnings announcements. The strategy can generate income but is typically not the primary goal.

How do I know when to exit this strategy?

Investors should look to exit the Calendar Spread Option Strategy when either the underlying asset reaches a predetermined point or when the option pricing discrepancies between the long and short legs of the spread begin to diminish. Additionally, investors should look to exit the strategy when their view on the underlying changes or when volatility levels start to move outside the predetermined range for the strategy.

How will market makers respond to this trade being opened?

Market makers typically don’t have a set reaction to this trade being opened. This is because market makers are typically seeking to find discrepancies in option pricing between the long and short legs of the Calendar Spread Option Strategy. As long as the strategy is balanced and the options pricing discrepancies remain large enough, market makers won’t react to the open trade.

What is an example (with calculations) of this strategy?

For example, let’s say an investor believes that the stock MSFT is going to stay within the $250 to $260 range till the expiration date of a written call option. The investor could enter into a Calendar Spread Option Strategy by selling one MSFT Call with a strike of $260 of near expiry and buying one MSFT Call with the same strike of next expiry. If MSFT remains between $250 and $260, the strategy can potentially make a profit. Typically, the investor would be risking a limited amount to potentially gain a decent return.

MarketXLS is an easy to use and powerful Microsoft Excel-based software that allows investors to analyze and trade options. By utilizing MarketXLS, investors can save time, simplify their spreadsheets and easily create options chains, option quotes, calculations and historical data. MarketXLS also features an integrated Options Explorer, which can be used to analyze various strategies like the calendar spread option strategy and evaluate their outcomes. Additionally, MarketXLS boasts an options calculator which allows users to calculate theoretical values and Greeks for unlimited number of options and strategies. Therefore, MarketXLS is an excellent tool to help investors analyze and trade Calendar Spread Option Strategies.

Here are some templates that you can use to create your own models

Long Calendar Spread With Calls Option Strategy
Long Calendar Spread With Calls Option Strategy
Long Calendar Spread With Puts Option Strategy
Long Calendar Spread with Puts Option Strategy
Calendar Strangle

Search for all Templates here: https://marketxls.com/templates/

Relevant blogs that you can read to learn more about the topic

Long Calendar Spread Using Puts Option Strategy
Making the Most of ShortDated Options
How to Manage Risk with Calendar Spread Options
Options Trading (Strategies)
Option Strategy- Long Calendar Spread (Excel Template)