A cash flow option technique that is used by both professional traders as well as retail traders is the Calendar Spread. This technique is a favorite among option traders who use options as a way to generate reliable monthly cash-flow.
The calendar spread is an option strategy that makes it's money from the fact that options are an evaporation asset that loses it's value over a period of time. decaying value. This is how the trade makes money. As expiration day approaches, the premium that was sold in the near month option loses it's value - allowing the option trader to buy it back much cheaper than it was sold for.
Calendar spreads can be constructed from both call options and put options. To build a calendar spread position, one sells a closer month option at a particular strike - and then purchases a further out month option at the exact same strike. This spread makes money due to the fact that the value in the closest month option deteriorates at a quicker rate then the farther out month option. This difference in the value decay of the two different month options is what helps to create the profits in these trades.
Here's a sampling of a calendar spread position: Sell 10 April 35 put. Purchase 10 May 35 put.
Now while in the example above the calendar position was created using joined together months, calendar spreads can also be created with a gap between the months.
For example, rather than constructing a calendar spread using Aug and Sept month options, it could be created using a Aug month option and an Oct month option - or a Aug month option an a Nov month option.
Typically calendar spread traders will utilize this strategy when they believe the underlying vehicle they are trading will stay in a range - or will wind up on expiration day close to or right at strike price which was sold.
It is a common belief that the calendar spread is easier to manage than some of the other option trading strategies that are out there - which might explain why they are so preferred to technique like the iron condor, the butterfly, and / or the credit spread. Nevertheless - what is mutually agreed upon is that the calendar spread strategy is definitely a technique serious option traders should learn and have it ready to be put to use when needed.
The calendar spread is an option strategy that makes it's money from the fact that options are an evaporation asset that loses it's value over a period of time. decaying value. This is how the trade makes money. As expiration day approaches, the premium that was sold in the near month option loses it's value - allowing the option trader to buy it back much cheaper than it was sold for.
Calendar spreads can be constructed from both call options and put options. To build a calendar spread position, one sells a closer month option at a particular strike - and then purchases a further out month option at the exact same strike. This spread makes money due to the fact that the value in the closest month option deteriorates at a quicker rate then the farther out month option. This difference in the value decay of the two different month options is what helps to create the profits in these trades.
Here's a sampling of a calendar spread position: Sell 10 April 35 put. Purchase 10 May 35 put.
Now while in the example above the calendar position was created using joined together months, calendar spreads can also be created with a gap between the months.
For example, rather than constructing a calendar spread using Aug and Sept month options, it could be created using a Aug month option and an Oct month option - or a Aug month option an a Nov month option.
Typically calendar spread traders will utilize this strategy when they believe the underlying vehicle they are trading will stay in a range - or will wind up on expiration day close to or right at strike price which was sold.
It is a common belief that the calendar spread is easier to manage than some of the other option trading strategies that are out there - which might explain why they are so preferred to technique like the iron condor, the butterfly, and / or the credit spread. Nevertheless - what is mutually agreed upon is that the calendar spread strategy is definitely a technique serious option traders should learn and have it ready to be put to use when needed.
About the Author:
Ted Nino is an option selling fanatic - particularly nuts about trading the Calendar Spread, the Butterfly Spread, Credit Spreads, and Iron Condors. Be sure to visit his Calendar Spread Blog to learn his simple step-by-step method to trade this strategy for consistent monthly returns.
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