What is a calendar spread option strategy?

The calendar spread option strategy consists of purchasing a call option long-term and selling a call option short-term derived from the same financial instrument with the same exercise price but a different expiration date. In other words, traders try to benefit from the anticipated differences between time transit and options volatility.

When should you use a long calendar spread?

A long calendar spread is a good strategy to use when you expect the price to be near the strike price at the expiry of the front-month option. This strategy is ideal for a trader whose short-term sentiment is neutral. Ideally, the short-dated option will expire out of the money. Once this happens, the trader is left with a long option position.

What is double calendar spread & reverse calendar spread?

Double Calendar Spread – It involves buying future months’ call and put options and selling near-month calls and puts with the same strike price. Reverse Calendar Spread – It acts reversely, wherein the traders take an opposite position. They sell a longer-term option and buy a short-term option on the same underlying security.

Is calendar trading a good strategy?

Calendar trading has limited upside when both legs are in play. However, once the short option expires, the remaining long position has unlimited profit potential. In the early stages of this trade, it is a neutral trading strategy. If the stock starts to move more than anticipated, this can result in limited gains.