Calendar Spread
Calendar spreads, also known as time or horizontal spreads, is a neutral strategy with a medium
level of risk and a high potential reward. This strategy is just one of many that you can learn
about by obtaining a BetterTrades options trading education.
How it works: A long calendar spread involves A) buying an option with a longer expiration and
B) selling an option with same strike price and a shorter expiration date.
Example: The stock you select is selling for $45. In this example you A) sell the June $45 call
(two months out) for $4.50 and B) purchase the July $45 call (three months out) for $6.50. This
leaves a $2 spread.
For the spread to make money, the June option would need to lose time premium faster than the
July option. If, a month later, the June call is $1.50 and the July call is $4.50, the spread
has been increased to $3 and could be closed for a one-point profit.
The payoff: The trade will produce if the underlying stock price is stable.
The drawback: Big swings in either direction will negatively impact the time value of both
options, causing the spread to lose value.
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