The most common form of calendar spread involves the purchase of a longer-term option and the sale of an equal number of shorter-term options of the same type and strike. Most spreads, (with the exception of spreads on underlying securities with very high carrying costs) will initially be placed for a debit because of the greater time value of the longer-term options. This strategy can potentially be used to generate income and/or to reduce/increase the cost basis of an eventual stock purchase/sale. Using calls, this strategy has similarities with covered call writing / buy-writes.
For use when investor anticipates:
Financial Characteristics:
Objectives:
EXAMPLE (Calendar Spread)
An investor feels that stock XYZ, which is trading at 60, will trade at this price for at least the next 3 weeks, and then might rally. The investor could sell the June 65 Calls (trading at 2.10), and buy the July 65 Calls (trading at 4.10). The net debit to the account would be 2, or $200. If XYZ is below 65 at June expiration, the short expires worthless, leaving the investor with a simple long position in the July 65 Calls that he can maintain, simply sell, or spread off with other July options. The short-term breakeven price cannot be calculated exactly. The long-term breakeven price (after the June expiration) is calculated by adding the net debit of the spread to the strike price of the long option.
Commissions, taxes, and transaction costs are not included in any of these strategy discussions, but can affect final outcome and should be considered. Please contact a tax advisor to discuss the tax implications of these strategies. Many of the strategies described herein require the use of a margin account. With long options, investors may lose 100% of funds invested. In-the-money long puts need to be closed out prior to expiration, since exercising them could create short stock positions.
Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Multiple leg options strategies will involve multiple commissions. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options." Member SIPC
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