striking price

Calendar spread

In finance, a calendar spread is an option spread trade involving the purchase of options of an underlying market expiring in some named month, and the simultaneous sale of other options of the same underlying market and the same striking price in a different month.

The usual calendar spread, also called a time spread or horizontal spread, involves the purchase of options of a named striking price expriring in a more distant month and the sale of options having the same striking price that expire in a more nearby month.

The calendar spread is a strategy used by the trader in an attempt to take advantage of a difference in the implied volatilities between two different months' options. The trader will ordinarily implement this strategy when the options he is buying have a distinctly lower implied volatility than the options he is writing (selling).

In the typical version of this strategy, a rise in the overall implied volatility of a market's options during the trade will tend very strongly to be to the trader's advantage, and a decline in implied volatility will tend strongly to work to the trader's disadvantage.

If the trader, instead, buys a nearby month's options in some underlying market and sells that same underlying market's further-out options of the same striking price, this is known as a reverse calendar spread. This strategy will tend strongly to benefit from a decline in the overall implied volatility of that market's options over time.

A calendar spread may be implemented using either call options or put options, but never with calls and puts used together in the same trade.

References

  • McMillan, Lawrence G. (2002). Options as a Strategic Investment. 4th ed., New York : New York Institute of Finance. ISBN 0-7352-0197-8.

External Resources

Calendar Spread Screener www.avasaram.com

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