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What are Calendar Spreads?

Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 October 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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One of the more common ways to maximize profits from trading ventures is to employ a process that is referred to as calendar spreads. Here is an overview of how calendar spreads are conducted, and why they can yield some big benefits.

Essentially, calendar spreads are a method of buying and selling options on the same underlying security with an eye to reversing the process within an expressed period of time. The only difference is that the expiration date for options that are bought and the options that are sold is different. In most cases, the strike price will be the same in both transactions.

There are different types of calendar spreads employed today. The time spread or horizontal spread actually uses a simultaneous sale model. That is, while the strike prices are the same and the expiration dates are different, the actual buying and selling is not stretched out over a month or several months. Both transactions occur at the same time. This sort of a calendar spread basically trades like items with the expiration date being the only difference, so that the investor is only holding one set of options at any given time.

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More commonly, calendar spreads do not involve a simultaneous transaction of both components. The investor will purchase options on the security while still retaining other options of like price on the same security. For a month or so, the investor will hold both sets and will make some money off both sets of options. As the expiration date approaches for the older set, the investor will then sell of one set of options, while retaining the other.

Shortly thereafter, the process will begin again. The aim in this model of calendar spreads is to maintain as many options as possible on the same security. Typically, this strategy will be used when the security is doing very well, and the chances for making an increased profit from the options are high.

Simultaneous calendar spreads also will make money, in that it allows the investor to constantly be in control of some options on the security that is doing so well, without having to lose those options due to running over an expiration date. By constantly buying newer options with an extended expiration date and then selling those with an expiration date fast approaching, the steady flow of profit from the venture remains unabated.

Of course, the real trick in using calendar spreads is to deal with a security that shows consistent growth, so there will actually be some profit to realize from the options. However, once the investor has located a security that does maintain a steady rate of growth, it is relatively easy to begin using calendar spreads as a way to always maintain options of the security, and thus keep a steady source of profit in place.

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