Option traders can utilize calendar spreads as a way to get into a long position at a cheaper price by selling the other leg and bringing in a credit. As a result, the option trader has the choice of owning longer term calls or puts for less money. Keep in mind that this strategy can be used with both calls or puts.
How To Trade A Calendar Spread
As said earlier, the calendar spread is an option trading strategy where a trader opens two legs with different expiring dates for the same security.
In the picture above, you can see that we are selling the earlier expiration (aka the front month) in January and buying the longer expiration set for February. Your max loss on this trade is your net debit you paid to open the position while your max gain is theoretically unlimited.
So for instance if you have a long call position but think that prices might come down in the near term, you could sell a call against it with a shorter expiration and look to hedge your long call in the event prices do move down or stay stagnant.
This is a more advanced option strategy so if you’re new to options trading then you may want learn the ropes a little more before opening a spread. The good news with this spread is that you have a max loss so your risk is limited.
Trading options is a lot more complex than stocks but it also offers a lot of versatility which allows knowledgeable option traders to make money in almost any market condition.
Learning to trade spreads isn’t easy but once you understand the basics and have gained enough confidence then they can add an incredible amount of versatility to your trading. It’s always a smart idea to practice new strategies in a simulator so you aren’t figuring things out while risking real capital.