The
calendar spread refers to a family of spreads involving options of the
same underlying stock, same
strike prices, but
different expiration months. They can be created
with either all calls or
all puts. Also known
as time spread or horizontal spread.
Call Calendar Spread
Using
calls, the calendar spread strategy can be setup by buying long term calls and simultaneously writing an equal number of
near-month at-the-money or
slightly out-of-the-money calls
of the same underlying security with
the same strike price.
The
idea behind the calendar spread is to sell time, which is why calendar spreads
are also known as time spreads. The options trader hopes that price of the
underlying remains unchanged at expiration of the near month options so that
they expire worthless. As the time decay of near month options is at a faster
rate than longer term options, his long term options still retain much of their
value. The options trader can then either own the longer term calls for less or
write some more calls and repeat the process....
