Calendar Spreads
Calendar Spread are another potentially useful advanced technique. They are constructed by selling an option (usually out of the money) with a near-term expiration and simultaneously buying an option of the same strike price that is further out in time. Hence the term calendar spread. As in the case of credit spreads, they can be implemented with put or calls, depending on your view of the market. Unlike credit spreads, the calendar spread does not result in an immediate net credit to your account. So why would a safe options trader be interested in them? The reason is that the calendar spreader wants to take advantage of (1) the time decay of the short sold option, betting that it will expire worthless, but (2) still maintaining the long option in the hopes that it will increase in value as the market eventually rises and then selling it at a profit. The calendar spread is truly an advanced strategy. Consider employing a call calendar spread when you have an overall bullish view of the underlying stock or ETF, but you forecast a short-term dip or period of no upward movement. Do not try this until you have paper traded it for a while, and have made profits using cash-secured puts, covered calls, and credit spreads. In many respects, the call calendar spread is similar to the covered call. The bought longer-term option in the calendar spread is functioning the same way as the stock shares do in the covered call. In both strategies, the investor is waiting on the sold short option to die worthless, thus pocketing the premium. The main difference is that the bought option also has a limited lifespan, unlike stock or an ETF. One particularly interesting way to use calendar spreads involves the use of LEAPS (Long-Term Equity Anticipation Securities), which are options with a year or longer of life. Because they decay very slowly in value, many people use LEAPS as the bought option and then sell consecutive short-term options against the LEAPS, thereby generating multiple premiums over the life of the LEAP option. An interesting thought indeed! Click Here!
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