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Option Spreads - Calendar Spreads

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In the first article on Options Spreads, we discussed the Advantages of Debit and Credit Spreads; the second discussed Call Vertical Spreads; both Debit and Credit; and in the third we discussed Put Vertical Spreads; both Debit and Credit. In this article we'll discuss Calendar Spreads; both Call and Put.

There are two Calendar spreads: Call Calendar spread, and Put Calendar spread; both are debit spreads. Calendar spreads are also referred to as horizontal spreads (because each option is located in a different option chain).

NOTE: click on the pictures to enlarge.

Call Calendar Spread

This spread is comprised of a long-term long call and a near-term short call at the same strike. (If the strikes differ, then it's referred to as a call diagonal spread).

The Call Calendar spread has the following characteristics...
o debit spread (you pay for this position)
o slightly bullish expectation (underlying up slightly)
o delta is slightly positive
o vega is positive (increased volatility wanted)
o theta is positive (make money with time decay)

In the example to the right, this spread is
o Long JAN14 164 (green box)
Short OCT13 164 (red box)
o the cost is $2.50 (or $250 per contract; white box)
o this spread is 3-months wide (OCT - JAN)
o max gain estimated $240; max loss $250
Note: max gain could be unlimited if constantly selling a short-term call as each expire.
o breakeven 158 & 170 (changes over time)
o probability of profit: 42.5% (at entry of trade)

Capital Requirement is $250 (max loss)
Primary exit strategy (for a profit): exit when the profit reaches a percent ROC (if 50% ROC, then 0.5 x $250 = $125 is profit target)
Secondary exit (for a losing position): exit at percent ROC (50% loss = -$125; could roll the short option to create a diagonal for a net credit reducing the loss.

Put Calendar Spread
This spread is comprised of a long-term long put and a near-term short put at the same strike. (If the strikes differ, then it's referred to as a put diagonal spread).

The Put Calendar spread has the following characteristics...
o debit spread (you pay for this position)
o slightly bearish expectation (underlying down slightly)
o delta is slightly negative
o vega is positive (increased volatility wanted)
o theta is positive (make money with time decay)

In the example to the right, this spread is
o Long JAN14 163 (green box)
Short OCT13 163 (red box)
o the cost is $3.15 (or $315 per contract; white box)
o this spread is 3-months wide (OCT - JAN)
o max gain estimated $250; max loss $315
Note: max gain could be unlimited if constantly selling a short-term call as each expire.
o breakeven 156.60 & 169.20 (changes over time)
o probability of profit: 44.86% (at entry of trade)

Capital Requirement is $315 (max loss)
Primary exit strategy (for a profit): exit when the profit reaches a percent ROC (if 50% ROC, then 0.5 x $315 = $157.50 is profit target)
Secondary exit (for a losing position): exit at percent ROC (50% loss = -$157.50; could roll the short option to create a diagonal for a net credit reducing the loss.

Compared to Vertical Spreads, Calendar Spreads do NOT have a fixed level of profit, or fixed breakeven points.

Below are the Risk Profiles (at expiration) for the Call Calendar and Put Calendar, with breakeven points..

In conclusion, we've discussed the Calendar Spread (also known as a Horizontal Spread), both Call and Put.

If you would like to learn more about options, and how to generate consistent weekly income trading options, go to Options Annex.

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