Calendar Spread Option Trading Strategies

By Author: chelle
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Horizontal spread is an option trading strategy which is created by simultaneously purchasing and writing two options on the same asset (stock) and strike price but different expiration dates. Horizontal strategy is most known as Calendar spread because the options has different expiration date. Calendar spread, one of many different option spreads, is a neutral strategy. You can only make profit if the underlying price does not move a lot or only moves in a tight range. If the stock rises or drops a lot, you will not get profit because of the volatility. This is a not a no risk option strategy, but it do have low risk. There is no such thing a no risk option strategy.
Calendar spread options strategy makes profit from the difference of option premium decay or the difference of implied volatility. Options which is near to expire will lose its value very fast. On the other hand, option which is far from expiring will lose its value slower. Trader will implement calendar spread by buying option which is far from expiring and selling option which is near to expire. After some time they will reverse the position by buying ...
... the option they previously sell and selling the option they previously buy. This is also called spread trading. Investor can buy call option or buy put option with this strategy. But I prefer using put option because it is cheaper.
To understand more about it, I will give you an example. Imagine stock XYZ is trading at $50 per share. To create the calendar spread, you want to buy September $50 call and sell August $50 call. The September call will cost you $6 and August call will give you $4. The spread is $2 and this is the total cost for the strategy. For this strategy to work, you will want August call to lose its value faster than September call.
In July the options might look like this. August call will worth $1 and September call will worth $4. Your spread will be $3. You profit will be the spread difference which is $1. In order to work the underlying stock price must remain stable. Any drop or rise will affect the time value and option price.
Calendar spread can be used to make monthly income and that’s why it is called income strategy. You don’t need the stock to move to be successful. That is why it is called non directional strategy. Best candidate for this strategy are channeling or sideways stocks. Those stocks tend to move in a small range. Here are some tips when choosing the stock:
• Don’t choose volatile industry like technology or commodity companies
• Don’t have earning release in the coming months.
• Check for their website for possible take over or mergers. That is bad news for you.

Discovering the exact option trading strategies for a business is not difficult by getting the exact data and ready to take the risk.You can also visit this site http://bestoptionstrategy.com/calendar-spread/ for more info.