Calender Spreads as low risk Option Trading Tricks

Option traders can leverage both from market neutrality and expiration, thanks to Calender Spreads. It's a conservative strategy, that non directional investors can rely on for moneymaking without having to predict market movement direction.

Calender spread, aka time spread is the strategy that finds its value most during sideways movement of the market. This spread actually consists of different options of the same underlying asset, same striking price and other details, but different expiration period. Basically, you are to buy an LEAP call, write one or two strikes OTM, and then sell a front end option at the same strike price. Time decay value of the option is associated with IV, and as investor, you will wish to take advantage of this volatility diversification. Anything you are buying should have a lower volatility than that you are selling, and manipulations are made to let this volatility work in favor of your spread and against your sell.

The underlying assets of both the options are expected on or around the strike price until expiration in this spread. The front end option which has an immediate expiry date keeps losing its value without going into the money, whereas the option that you bought will retain most of it's value, since its expiration date is way further. Means, you are buying option time at lower price and then selling it at higher price to the speculators, thus the spread as a whole increases in value. The closer an option reaches its expiry date, faster it loses it value, implies a difference in values with the option that has longer expiration period. Upon tactful management of this valuation difference, the trader can enjoy a healthy payoff advantage. The trade takes the money as well, when the volatility of month option doesn't fall the same degree as the front month does.

Factors that influence volatility are good times to exercise your calender spreads. One such example could be going into earnings announcement, which commonly causes a positive thrust to volatility. You can, in such a case, sell the spread into earnings and take it off when earnings are announced. The sold option should expire after the earning date, and long option should be further out. After the announcement of earnings, a great fall in volatility is the immediate result. This drop impacts havoc the premium of the sold option by losing most it, but the long option will retain its volatility, and the premium will be hardly affected.

The following are some trusted indications to let you intimate about the timing of calender spread

1.Stable Stock: Stock volatility damages your expected benefit from spread. A stock that showed no violent breakouts of momentum, or a controlled RSI over past few months should be your choice. Even if the stock price fluctuates, if should not go too far from its original price. Study of Bollinger breakouts or any related stochastic breakouts, if any, to confirm the stability.

2.Signs of Gapping: Chosen asset shows a gap sign, every time there is an announcement on earnings, means you think twice before considering it in your calender spread strategies. Go ahead only when you are confident to handle all these.

3.Low Implied Volatility: Calender spreading should be implemented on an asset whose implied volatility is lower than market average. High volatility implies you are threatening your spread by losing out your investment.

Calender spread is no doubt a great strategy, especially when volatility in the market is low. Provided you know how to do it.

There are numerous ways to look into the option trading strategies to earn extra bucks by leveraging risk-return exposure. Your choice on professional option trading firms makes the deal a highly lucrative one for you.

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Keywords: Option Trading, Options Trading Consultant, Momentum Options

By: Christina Benson

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