A calendar spread is an income trade that involves selling a short-term option and buying a longer-term option with the same strike price.
Usually, this is done with monthly options, but it can also be done with weekly options. Traders typically use call options unless the trade has a bearish bias, in which case they would use puts.
In today's example, we'll look at a calendar spread trade on CrowdStrike, an IBD 50 component.
With CRWD stock trading around 275, setting up a calendar spread at 300 gives the trade a very slight bullish outlook.
Late Tuesday, selling the Feb. 16 call option with a strike price of 300 would generate around $400 in premium, and buying the March 15, 300 call cost approximately $985.
Estimated Profit On CRWD Stock Trade: $800
That results in a net cost for the trade of $585 per spread. That's the most the trade can lose.
The estimated maximum profit is $800, but that could vary depending on changes in implied volatility.
The idea with the trade is that if CRWD stock moves toward 300 in the next few weeks, the sold option will decay faster than the bought option allowing the trade to be closed for a profit.
The March 15 call should hold its value reasonably well because earnings are set for early March.
The break-even prices for the trade are estimated at around 280 and 325. But these can also change slightly depending on changes in implied volatility.
For this reason, calendar spreads are considered a more advanced strategy and not recommended for beginners.
Profit Target For CRWD Stock Trade
For a trade like this, I would set a profit target of 30%, and I would set a stop loss if CRWD stock breaks through either 280 or 325.
CRWD stock is ranked No. 1 in its industry group and has a Composite Rating of 99, and EPS Rating of 99 and a Relative Strength Rating of 98.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
