Options Calendar Spread

In this excerpt from our options mentoring course, David gives us some insight on understanding the Options Calendar Spread.

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Options Calendar Spread

Video Transcript

We would sell an option, minus one, 30 days out. The idea is, this 30-day option will decay much faster. If we connect these point here from, if we connect this 0.30 down to zero, look at the slope of that line. It’s pretty steep. Look at the slope of this line, from 60 to 30 days out. It’s steep but I think you’ll be in agreement that it’s not as deep. The line between 90 and 60 tend to go like this. These two are pretty similar but you do see that this is more steep and this is more steep.

On a daily decay basis, your 30-month or 30-day to zero option is going to decay at a quicker rate. I’ll just give you numbers. Maybe this is decaying $5 a day and this one is only decaying $3 a day. You’re making $2 a day on theta per contract, let’s say. This is, all things being equal, if the level of the Russell or whatever underlying you’re using stays in a closed range on the chart. A traditional calendar will be put right at the money. We’ll do that here next. I just wanted to make sure you guys get a handle on this. Maybe this decay is over here only at $2 a day. The decay rates are different depending on how far out in time you are.

We can go to the analyze tab. We got the Russell up here and we’ll go to add simulated trades. Looking here, down at the option chain, we’ve got the different months, we’ve got some weeklies in here. We won’t really look at the weeklies. Those are very fast moving spreads and you can certainly use those but for or traditional calendars we’ll just look at the monthlies. Before we just jump in and do the February, March like we talked about, let’s talk about another important factor in calendar spreads…