A calendar spread is an options or 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.
KEY TAKEAWAYS
A calendar spread is a derivatives strategy that involves buying a longer-dated contract to sell a shorter-dated contract.
Calendar spreads allow traders to construct a trade that minimizes the effects of time.
A calendar spread is most profitable when the underlying asset does not make any significant moves in either direction until after the near-month option expires.
A diagonal spread is a modified calendar spread. It is an options strategy established by simultaneously entering into a long and short position in two options of the same type—two call options or two put options—but with different strike prices and different expiration dates.
This strategy can lean bullish or bearish, depending on the structure and the options utilized.
Thanks for posting this! I have a few more questions hoping you could expand on.
When you open a calendar spread, is this a long term play? For instance you opened the GWH spread today. Do you plan on holding until close to the NOV expiry?
Is there any way to lose more than your initial cost? Your graphic shows the maximum risk at $300 but there were times when I saw that my spread were in the red. Also what if someone exercises their call early? How would that work?
Does this have any effect on margin requirement? After I opened my spread today I saw that my option and stock buying power went negative even though I have cash in my portfolio. I did have to convert my cash account to a margin account to get options level 2 to open the spread so I wonder if its just taking time for the account to convert.
Calendar spreads reach maximum profit at expiry, so ideally they are held until either you decide the trade is going against you and you don’t want to miss out on profit so you close it, or you don’t have the capital to exercise so you close the spread on the day of expiry.
If you close the spread too early during a time of high volatility such as how the stock is currently trading there is the possibility of loss due to price inefficiencies of the spread. That could be a screwup on optionsprofit strat’s part though
because it is a debit spread, there are no margin requirements but you might need a higher options level to be able to trade them. I think you need margin to sell options against options, but that is just a general requirement.
