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A Neutral Calendar Spread strategy (which is normally referred to as just a Calendar Spread) involves selling an At The Money (ATM) option in the near month (closest to Expiration) and buying the same option at the identical Strike Price but in the following month which has a longer period of time before Expiration (the far month). The effect of Theta (time decay) reduces the price of the sold or Short option faster than the Long option to expand the potential profit. Calendar Spreads are sometimes called 'Time Spreads'.

Calendar Spreads usually cost money to enter, i.e. they are debit trades. They have defined risk limited to the debit required to initiate the trade. Calendar Spreads can be implemented with either Calls or Puts. Neutral Calendar Spreads are non-directional trades

Neutral Calendar Spread


See the Profit & Loss diagram of the Calendar Spread at OptionCreator

Example

XYZ is currently trading at 100

Short 1 x At The Money 100 Strike Call Option (30 days to expiry) for (-3)
Long 1 x At The Money 100 Strike Call Option (60 days to expiry) for 5

Net debit to enter trade: (-2)

XYZ remains at 100 at expiration of short option

Short 1 x 100 Strike Call Option (near month) is At The Money and has no Intrinsic Value, profit = 3
Long 1 x 100 Strike Call Option (far month) has an Extrinsic Value of 3.5, loss = 1.5

Net profit = 1.5
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Contributed by: Ralph Windsor

Featured Video View All

Trading an Options Calendar Spread for profit - complete how to.

Video on finding and implementing calendar spread trades using stock options from 'Uncle Bob's Money' options advisory service.


External Links

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Calendar Spreads
http://www.riskreversal.com/education/calendarspreads/

Riskreversal.com article about Calendar Spreads.

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How we Trade Calendar Spreads
https://steadyoptions.com/articles/calendar-spread/

Article by Kim Klaiman of Steady Options with some advice and recommendations for trading calendar spreads.

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View Steady Options in Options Market Glossary Directory

Why Calendar Spreads Are An Oxymoron
http://www.optionstradingiq.com/why-calendar-spreads-are-an-oxymoron/

This article discusses the conflict between Calendar spreads being volatility-positive (long vega) but still needing to remain within a trading range, as with short volatility strategies like Iron Condors.

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View Options Trading IQ in Options Market Glossary Directory

Calendar Spread (TastyTrade.com)
https://www.tastytrade.com/tt/learn/calendar-spread

Tasty Trade article about Calendar Spreads.

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View Tasty Trade in Options Market Glossary Directory

How to trade a Calendar
http://www.unclebobsmoney.com/learning/income-generating-strategies/how-trade-calendar#description

Background and overview about how to trade calendar spreads.

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Long Call Calendar Spread (Call Horizontal)
http://www.optionseducation.org/strategies_advanced_concepts/strategies/long_call_calendar_spread.html

OIC description of Calendar Spreads using Calls.

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View OIC Options Glossary in Options Market Glossary Directory

Bull Calendar Spread
http://www.theoptionsguide.com/bull-calendar-spread.aspx

The Options Guide article on Bull Calendar Spreads.

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View Options Guide Strategy Finder in Options Market Glossary Directory


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Video

Trading an Options Calendar Spread for profit - complete how to.

Video on finding and implementing calendar spread trades using stock options from 'Uncle Bob's Money' options advisory service.