Trade Insights: Calendar Spreads Options Strategy

Today, we will talk about using Calendar Spreads as a tool for Options Strategy. Options Strategy is one of the Five Ways To Protect Your Portfolio.


What is Options Strategy?


Wikipedia definition on Options Strategy: “The simultaneous, and often mixed, buying or selling of one or more options that differ in one or more of the options’ variables. Call options, simply known as calls, give the buyer a right to buy a particular stock at that option’s strike price. Conversely, put options, simply known as puts, give the buyer the right to sell a particular stock at the option’s strike price.”

Options, when used correctly, can be a great tool for investors to hedge themselves against the risk of major downturns in the market as well as general market volatility, particularly in these times of uncertainty.


Options Strategy using Calendar Spreads


This article should provide an insight into the use of calendar spreads as an options trading strategy to do just that, as well as provide a real life example of how this is executed on a brokerage platform, in this case Interactive Brokers.

A calendar spread ultimately aims to take advantage of the mismatch in maturity between different options positions and therefore allows investors to profit off the time decay as they head towards their expiry date. It can be seen in the payoff diagram below that at the expiry of the front month option, profit is maximised when the share price of the underlying asset is as close to the strike price of the option as possible (A).

market neutral strategy


From the real life example below, the trade utilises two call contracts of the same strike price (12,000) on the NASDAQ. However as you can see they vary in their maturity or the date this option expires with the sold call expiring earlier (Nov 20, 2020) than the bought call (June 18, 2021).

Call Options

In this case, this strategy has been effective in generating a profit where while the short maturity call option has declined in value as the market has slowly crept up, the long-dated call has gone up in value at a proportionally higher rate to reflect the difference in their time value.

Often investors will use this technique if they are relatively market neutral in the short-term however believe the market will be above a specific strike price in the future, in this case 12,000 points on the NASDAQ index. As the short maturity options comes to its expiry (Nov 20), investors can then choose to sell another call option or perhaps hold a naked position in their long dated call option to maximise their profit potential if they are particularly bullish.

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This article does not take into account the investment objectives, financial situation or needs of a particular person or entity. Before acting on any investment strategy or advice you should first consult with your current ASIC accredited investment professional or seek out a compliant investment professional for such. 

About The Author

Jim Mackay

Jim is an Associate Advisor at McKeown Marrs. He recently graduated from University of Melbourne, majoring in Finance and Management with a deep interest in the capital markets sector. Throughout his time at university, Jim has been actively involved with a number of student societies including the Commerce Student Society (CSS), Melbourne Microfinance Initiative (MMI) as well as holding the position of Treasurer at Oaktree, a not-for-profit organisation.