What is a calendar spread options strategy?

Here is one way to capture opportunities created by volatility. The calendar spread options strategy is a market neutral strategy for seasoned options traders that expect different levels of volatility in the underlying stock at varying points in time, with limited risk in either direction.

How does a calendar spread profit?

A calendar spread profits from the time decay of options. The trader buys a longer-term option and sells a shorter-term option with the same strike price. The idea is that the shorter-term option will expire worthless, while the longer-term option will retain more value due to its longer time until expiration.

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 a reverse calendar spread?

A reverse calendar spread takes the opposite position and involves buying a short-term option and selling a longer-term option on the same underlying security. The purpose of the trade is to profit from the passage of time and/or an increase in implied volatility in a directionally neutral strategy.