Understanding "Calendar" trades · Invest & Retire Community

21d (edited) • Long term investing ideas

Understanding "Calendar" trades

I had trouble understanding calendar trades until recently. I would like to share my new insights into these trades to see if it helps anyone.

A Calendar trade has two legs just like any spread trade. For a regular spread trade, you sell a put or call at a strike (say 110) and buy at another strike (100) both expiring the same date. For a calendar trade you sell and buy the same strike at different dates. This is where it was confusing for me.

Here is how I understand it now. Let's say you buy a stock and write a CC (covered call) on it. If the stock price rises, you limit your profit and let it be called away. If the stock falls, the CC will become profitable (and you can close it) and wait for the stock to bounce back to make more gains. This is a pretty safe strategy but requires capital to buy the stock. A lower cost but similar strategy would be PMCC (Poor Man's Covered Call). Here you would buy LEAPS (longer dated calls) instead of stock and then sell CC on it.

A calendar is exactly similar to PMCC. You buy a longer dated call (or put) and sell a shorted dated call both in one transaction (unlike PMCC where you sell the shorter dated calls periodically). So a calendar trade is a more protective way of buying calls. You limit the downside risk by selling a shorter dated call and benefit from the premium received. You also limit the upside profit (due to the shorter dated call).

Calendars are a safe way to buy calls (if you are bullish on a stock). They are also neutral trades in that the stock price has to expire within a certain range for the trade to be profitable. They have the benefit of doing well when volatility expands (there's fear in the market). In those cases, calendars profit range widens and they become even more profitable

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