Trading is by all means a complex task. It involves the movement of invisible money in largest amounts through big computer systems across the world, as per the ongoing market trends and the performance of the company. One needs to have a proper understanding about trading and everything else that comes with it. Some common terms such as ‘calendar spread’ and ‘iron condor’ should ring a bell to an expert trader, who deals with this invisible money throughout the day, and helps people and organizations make money better.
What calendar spread is
Stock trading has two most important aspects: Call and Put. Both of these aspects can be used for both short-term and long-term trading. The calendar spread comprises of both of these.The prime motive behind this strategy is to make the best use of the difference in volatilities coming between two months. This way, the stock can be same in a calendar spread, but the expiration date may vary, based on when the stock in particular was purchased.
Calendars comprise a combination of all call options or all put options, with a varying expiration date. As the expiration date nears, options start losing their value at a much faster pace. Thus, the options that were bought in the previous month will lose value faster than those bought in the same month, despite being of same values in the beginning. This will create a difference in values, which if traded with precision can create a handsome payoff for the trader.
Some aspects related to calendar spread
- Calendar spreads are often available for a low price, and don’t really require much adjustment in their value
- Such spreads are best used during times of low to high volatility
- There is no particular direction in which this strategy can work best
- It generates profit as the time starts decaying
- Risk in this strategy is mostly restricted to net debit
- Losses in this strategy are at their minimal if the stock price continues to move around dynamically
- There is also a provision to make excess returns if needed
When dealing with calendar spread, it is essential to time your entry with precision. Trading is always a risky affair, and any small error can also lead to big trouble later on. While dealing with this strategy, keep a tab on the expiration dates, as well as potential gaps for higher profits. Try to get ideas from professionals too if you can, which will only help you to do even better in the long run.