Managing Risk with Calendar Spread Options
A calendar spread (also called a time spread or horizontal spread) buys a longer-dated option and sells a nearer-dated option at the same strike. Risk is defined: the most a long calendar spread can lose is the net debit paid. The trade profits most when the stock sits near the strike at the near-term expiration, because the short option loses time value faster than the long one. Large moves in either direction, or a drop in implied volatility, are the main risks. This article is educational, not investment advice.
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Advantages of Calendar Spread Trading
A calendar spread has three main advantages. First, the maximum loss is limited to the net debit paid for the spread. Second, it collects time decay: the short near-term option decays faster than the long later-dated option, so the spread gains value if the stock stays near the strike. Third, it benefits from a rise in implied volatility, which lifts the longer-dated option more. The trade-off is that it loses money if the stock moves far away from the strike in either direction before the short option expires.
Factors to Consider in Calendar Spread Trading
There are several important factors to consider when trading calendar spreads, such as risk and reward, volatility, bull and bear spreads, profit and loss potential, implied volatility and market sentiment.
Risk and reward is an important factor to consider when trading calendar spreads, since it affects the amount of potential profit and loss. Volatility is also important, as it affects the cost of the spread as well as the profit potential. Traders can also set a calendar spread above or below the current price to give it a bullish or bearish tilt, which changes the risk and reward. It is important to consider which one is more appropriate depending on the current market conditions.
Analyzing the Market with Greeks
In addition to the factors above, the various “Greeks” can be used to analyze the market and determine which strategy would be most profitable. The Greeks are mathematical terms used to illustrate the effect of market factors such as volatility and time decay on the price of options. By understanding the Greeks, it is possible to gain a better understanding of market trends and how to trade calendar spreads most effectively.
Using MarketXLS to Help Manage Risk in Calendar Spread Trading
MarketXLS is an Excel add-in that pulls option quotes, implied volatility, and Greeks into a spreadsheet, so you can price both legs of a calendar spread and track the position. Use =OptionSymbol(...) to build each leg's symbol, =QM_GetOptionChain("AAPL") to pull a chain, and the calendar spread templates listed below to model payoff. Options data is end-of-day on the Standard plan and real-time streaming on the Advanced and Business plans (see pricing).
Conclusion
A calendar spread combines a short near-term option and a long later-dated option at the same strike, with the net debit as the maximum loss. It is important to understand the risks associated with the strategy, as well as the various factors that can affect the price of an option. By using MarketXLS, investors can gain a better understanding of the market, analyze options such as calendar spreads, and get an insight into implied volatility. With the help of MarketXLS, investors can gain a better understanding of the market and be better prepared to manage risks associated with options trading.
To learn more about vertical options spread, click MarketXLS vertical-options-spread guide.
Here are some templates that you can use to create your own models
Long Calendar Spread With Calls Option Strategy
Long Calendar Spread With Puts Option Strategy
Calendar Strangle
Search for all templates here: MarketXLS templates
Relevant blogs that you can read to learn more about the topic
Long Calendar Spread Using Puts Option Strategy
Long Call Diagonal Spread – An Advance Option Strategy
Option Strategies For Professional Traders
Vertical Options Spread (Using Marketxls)
