What is a calendar spread?

A calendar spread (or time spread) refers to a market-neutral strategy of buying a long-term call option and selling a short-term call option of the same derivative simultaneously, having the same type, strike price, and slightly varying expiration times. It minimizes the impact of time on the options trade for the day traders and maximizes profit.

What is a reverse calendar spread?

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. The following calendar spread examples will help us understand the topic more clearly.

Should you trade a calendar spread?

There are a few trading tips to consider when trading calendar spreads. When trading a calendar spread, the strategy should be considered a covered call. The only difference is that the investor does not own the underlying stock, but the investor does own the right to purchase the underlying stock.

Why can't I calculate break-even for a calendar spread?

The break-even for a calendar spread cannot be calculated due to the different expiration cycles being used. The long option will still remain when the short option expires, and we don’t know how much extrinsic value that option will have.