Calendar spread
Encyclopedia
In finance
, a calendar spread (also called a time spread or horizontal spread) is a spread trade
involving the simultaneous purchase of futures
or options
expiring at particular date and the sale of the same instrument expiring another date. The legs of the spread vary only in expiration date; they are based on the same underlying market and strike price.
The usual case involves the purchase of futures or options expiring in a more distant month and the sale of futures or options in a more nearby month.
between two different months' options. The trader will ordinarily implement this strategy when the options he is buying have a distinctly lower implied volatility than the options he is writing (selling).
In the typical version of this strategy, a rise in the overall implied volatility of a market's options during the trade will tend very strongly to be to the trader's advantage, and a decline in implied volatility will tend strongly to work to the trader's disadvantage.
If the trader instead buys a nearby month's options in some underlying market and sells that same underlying market's further-out options of the same striking price, this is known as a reverse calendar spread. This strategy will tend strongly to benefit from a decline in the overall implied volatility of that market's options over time.
Calendar Spread Screener www.avasaram.com
Calendar Spreads - Harnessing the Power of Time Decay
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, a calendar spread (also called a time spread or horizontal spread) is a spread trade
Spread trade
In finance, a spread trade is the simultaneous purchase of one security and sale of a related security, called legs, as a unit. Spread trades are usually executed with options or futures contracts as the legs, but other securities are sometimes used...
involving the simultaneous purchase of futures
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
or options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
expiring at particular date and the sale of the same instrument expiring another date. The legs of the spread vary only in expiration date; they are based on the same underlying market and strike price.
The usual case involves the purchase of futures or options expiring in a more distant month and the sale of futures or options in a more nearby month.
Uses
The calendar spread can be used to attempt to take advantage of a difference in the implied volatilitiesImplied volatility
In financial mathematics, the implied volatility of an option contract is the volatility of the price of the underlying security that is implied by the market price of the option based on an option pricing model. In other words, it is the volatility that, when used in a particular pricing model,...
between two different months' options. The trader will ordinarily implement this strategy when the options he is buying have a distinctly lower implied volatility than the options he is writing (selling).
In the typical version of this strategy, a rise in the overall implied volatility of a market's options during the trade will tend very strongly to be to the trader's advantage, and a decline in implied volatility will tend strongly to work to the trader's disadvantage.
If the trader instead buys a nearby month's options in some underlying market and sells that same underlying market's further-out options of the same striking price, this is known as a reverse calendar spread. This strategy will tend strongly to benefit from a decline in the overall implied volatility of that market's options over time.
External Resources
Google Gadget for Daily Top Calendar SpreadsCalendar Spread Screener www.avasaram.com
Calendar Spreads - Harnessing the Power of Time Decay