An options strategy, also called a calendar spread, allows investors and traders to enter short and long positions simultaneously because of the same strike price with different expiration dates.
Options traders often utilize calendar spreads to get a long position at a more reasonable price by selling the other leg and producing credit. Because of this, the options trader has the choice to own longer-term puts or calls for less capital. Remember that this strategy can be used when using both puts and calls.
Trading Calendar Spreads
A calendar spread is a strategy for option trading where traders can open two legs with different expiring dates but have the same security.
A trader’s max loss on a trade could be the net debit they paid to open the position while their max gain was unlimited. The concept behind this approach is to reduce their cost of opening a long position. It is also exceptional for hedging.
Let’s say a trader has a long call position but thinks that prices might come down in the near term. They could sell a call against it with a quicker expiration and look to hedge their long call in the event that prices either move down or stay stagnant.
This is a more advanced option strategy, so if this is new for you, then go back and learn the ropes a little more before opening a spread. This spread allows you to have a max loss, so your risk is limited. This is a great benefit.
Trading options is a lot more complicated than stocks, but you also get far more versatility, allowing you to make much more money in just about any market condition if you have experience in this strategy.
It isn’t easy learning to trade spreads, but once you grasp the basics and have gained enough confidence, then you can add more versatility to your trading. Remember to continually practice new strategies using a simulator so you don’t risk real capital while figuring things out.