What are the characteristics of this option strategy?
Calendar spreads, also known as time spreads or horizontal spreads, sell a near-term option and buy a longer-dated option at the same strike on the same underlying. The trade consists of two options with different expiration dates but the same exercise price. The goal of the strategy is to profit from the near-expiry option you sold decaying faster than the longer-dated option you own, which works best when the underlying stays close to the strike. The strategy can also be used around earnings and news announcements or to take advantage of price discrepancies between the two expirations. It is opened for a net debit, and that debit is the most a long calendar can lose.
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. A long calendar risks at most the debit paid, but an early assignment on the short leg can leave you holding a stock position you did not plan for, so the risk profile 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 low to moderate risk-reward range. The loss is capped at the net debit paid, but a defined loss is not the same thing as a likely profit: the trade needs the underlying to finish near the strike at the near-term expiration, and a large move in either direction can cost the whole debit.
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 very elevated, the underlying is more likely to travel far from the strike before the near-term expiration, and that is the move that costs the entire debit paid.
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 do not take a view on your trade. They quote both expirations, hedge the delta and vega they take on, and earn the bid-ask spread. The practical point for you is that the far-dated leg is usually the thinner of the two, so enter and exit the calendar as a single spread order with a limit price rather than legging in.
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 close to $260 through the near-term expiration date. The investor could enter into a Calendar Spread Option Strategy by selling one MSFT Call with a strike of $260 in the near expiry and buying one MSFT Call with the same $260 strike in the next expiry, paying the difference in the two premiums as a net debit. If MSFT sits near $260 at the near-term expiration, the call that was sold expires close to worthless while the longer-dated call keeps most of its time value, and the spread can be closed for more than the debit. The most that can be lost is that debit, and it is lost if MSFT travels far from $260 in either direction.
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)