Calendar Spreads Explained - Advanced Options Trading Strategy

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What Is a Calendar Spread?
A calendar spread is an options or futures strategy established by simultaneously entering a long and short position on the same underlying asset but with different delivery dates.

In a typical calendar spread, one would buy a longer-term contract and go short a nearer-term option with the same strike price. If two different strike prices are used for each month, it is known as a diagonal spread.

Calendar spreads are sometimes referred to as inter-delivery, intra-market, time spread, or horizontal spreads.

Understanding Calendar Spreads
The typical calendar spread trade involves the sale of an option (either a call or put) with a near-term expiration date and the simultaneous purchase of an option (call or put) with a longer-term expiration. Both options are of the same type and typically use the same strike price.

Sell near-term put/call
Buy longer-term put/call
Preferable but not required that implied volatility is low
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.

Special Considerations
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.

Since the goal is to profit from time and volatility, the strike price should be as near as possible to the underlying asset's price. The trade takes advantage of how near- and long-dated options act when time and volatility change. An increase in implied volatility, all other things held the same, would have a positive impact on this strategy because longer-term options are more sensitive to changes in volatility (higher vega). The caveat is that the two options can and probably will trade at different implied volatilities.

The passage of time, all other things held the same, would have a positive impact on this strategy at the beginning of the trade until the short-term option expires. After that, the strategy is only a long call whose value erodes as time elapses. In general, an option's rate of time decay (theta) increases as its expiration draws nearer.

Maximum Loss on a Calendar Spread
Since this is a debit spread, the maximum loss is the amount paid for the strategy. The option sold is closer to expiration and therefore has a lower price than the option bought, yielding a net debit or cost.

The ideal market move for profit would be a steady to slightly declining underlying asset price during the life of the near-term option followed by a strong move higher during the life of the far-term option, or a sharp move upward in implied volatility.

At the expiration of the near-term option, the maximum gain would occur when the underlying asset is at or slightly below the strike price of the expiring option. If the asset were higher, the expiring option would have intrinsic value. Once the near-term option expires worthless, the trader is left with a simple long call position, which has no upper limit on its potential profit.

Basically, a trader with a bullish longer-term outlook can reduce the cost of purchasing a longer-term call option.

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#CalendarSpread #DiagonalSpread #TradingOptions
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DISCLAIMER:
This video is for entertainment purposes only. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.

[JakeBroe]

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[jigneshsoni]

Hi Jake. Calendar spread are usually a Volatility play. I use it all the time when the VIX are super low. I enter into double diagonal with around 30DTE-45DTE. I do some adjustments to stay delta neutral for the life of the trade. The idea is when VIX is super low, it cannot go much lower. Volatility spike can give some very good profits. Hope this helps,

[JeffScott-]

Thanks for making these. You're awesome! Thanks again for making them in 4K for those of us who aren't stuck using display technology from over ten years ago.

[blackice]

Hey cool! I asked for this and you delivered, thanks Jake

[NicksLocker]

Thanks! I'm not planning on doing this but I like knowing about it

[misaelarredondo]

Yep calendar spreads are a solid strategy! I like your take on spreads Jake.

[Barrera]

Thats why you look up your chart and get the strike you think the stock will be by expiration. Booom max profit

[iankraan]

you rock
i d love to see you doing stocks analisis videos

[obang]

Does it makes sense to sell the put or call before it declines?

[lj]

I’m debating entering a Calendar by Legging-in.. I’ve Bought a 30 day strike of $9 at .67 premium but the stock’s been volatile after earnings and projected to continue reaching higher lows so seeing how it’s fluctuating daily, I want to sell wkly calls on it and BTC for credits.

My first wkly is 2 wks out so I can give myself time to catch the dip. And seeing as there’s higher lows daily my first could theoretically cover the Full cost of my Long. I think that’s the best way to use a Calendar spread during uptrends. Theta method did not work well for me last time I used it on a different stock.

My fear and question would be what happens if both end up in the money, would I be losing and would I have to Early exercise my Long if I get assigned or is it done automatically from my brokerage like they do on Verticals?!
Thanks

[maynordiaz]

I play this calendar spreads I stocks that don't move much like Google and Berkshire Hathaway and you can make some good money

[jigneshsoni]

Hi Jake. Had a quick question for you or if anyone else can answer. Is there a quick/easy way to find all stocks/ETFs that are highly Volatile as well as highly liquid and Optionable? I know Finviz might be able to pull this but I don't know how to do it and if there is a better way to find this?

[BelarusianInUk]

What if you sell 60 dte and buy 30 for instance?

[sapphyx]

Is Charles Schwab easier to get options tier 2 than Fidelity?

[Afrovitta]

I am making money. But I can’t sell to get profit. Its maddening.

[Putseller]

This is one of those classic traditional option strategies that completely fell out of favor with newer traders. Everybody knows about the wheel or the poor mans covered call but who the heck does a calendar?

[Lou-jfrl]

This is why you sell them and dont buy them when IV is very high. 😂

[Brandon-rtdn]

I think you did a great job explaining Jake. What’s your favorite option strategy? Thanks for the video.