Option Strategies

Bullish  Long call Covered Call Bull call spread Bull put spread Short put
Bearish  Long put Short stock with protective Call Bear put spread Bear call spread Short call
Neutral  Butterfly spread calendar spread Double Diagoal Condor covered combo
Non-neutral & Misc  Sell straddle Collar Broken wing butterfly Ratio Spreads

 

Calendar Spread aka Horizontal Spread

Calendar spread is where an option of short term is sold and long term call is brought. Same strike same underlying. It is like leasing for long term and subleasing for short term.

 

Calendar spread works well in neutral markets and neutral or rising underlying volatility.

Pros and cons of Calendar Spread:

Pros of Calendar spread:

  • Stunning profit margins. 30 day calendar spreads can yield 100% profits.
  • Low Margins. Most option brokers require debit of the spread as margin requirement.
  • Commodity option calendar spreads might require much less margin than debit.
  • Risk is much lower. Successful calendar spread for two or three months is good enough for investment later.
  • Rise in volatility great for Calendar spread.

Cons of Calendar Spread:

  • Risk of assignment. If short term option becomes in the money, It can be assigned causing unexpected margin requirements in the portfolio.
  • Too volatile to carry into expiration. Profits can disappear with normal stock movements.
  • Risk may be higher than debit. This happens if the spread becomes deep in the money or very unexpected rise in volatility of short month but not the long month.
  • Sudden drop in volatility will result in losses for the whole spread.