17. Calendar Spread Options Strategy

Entering a long and short position on the same underlying asset at the same strike price but with different expiration date
The expiration difference can be a monthly or weekly or daily or anything
You are selling the front expiration and buying the back expiration
The position ends when the front expiration expires, then it becomes a normal long position

Buy a call at the back expiration at strike price k
Sell a cal at the front expiration at strike price k
Breakevens are undefined because of the different expirations
We want the short call to expire worthless, and at the same time our long call to be ITM,
The max loss is what you paid for the calendar spread, because the back month is a long and it is more expensive than the short, because it has more time to expiration

Underlying trading at 70
We initiate a call calendar spread at 80
We buy the 80 call for $6 with expiration of Nov
We sell the 80 call for $3 with expiration Oct
This position is a long oct/nov calendar spread for a debit of $3
The max loss is $3
The max profit and breakevens is undefined but we can approximate based on DTE
- Approximation based on 35 DTE, meanin the front call expired and the front has 31 DTE
  - Lets say that the ATM call@35 DTE is trading at 7
  - In this case your max profit would be 7 - 3 = $4
  - Breakevens at 70 and 90
With the front month near expiration ATM/OTM you can either
- Close the whole spread
- Leave the long call by itself (remember you will have time decay)
- Reestablish the calendar spread with another short call at the same strike price using a later expiration (but still earlier than the back expiration)
With the front month near expiration ITM you can either
- Close the whole spread
- Take assigment on the short call and sell you ITM long call as you cover your short stock
- Establish another position based on the remaining components

You sell a put in the front month
You buy a put in the back month
Max profit happens when the underlying is at the strike price
At expiration, the extrinsic value of the front option becomes zero and you profits come from the back month extrinsic value

Once the front short expires, the position becomes a long put

Undelying at 100
Select strike price to be 90
Sell the Oct put for $4
Buy the Nov put for $7
This position is the long oct/nov put calendar spread for a debit of 3
Approximation based on 35 DTE
- Lets say that the ATM put@35DTE costs $8
- Then your max profit would be 8 - 3 = $5