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 Goldman Sachs.
With Goldman Sachs stock trading around 335, setting up a calendar spread at 340 gives the trade a slight bullish outlook.
Selling the Oct. 13 call option with a strike price of 340 will generate around $575 in premium, and buying the Oct. 20, 340 call will cost approximately $805.
Maximum Profit Of $270
That results in a net cost for the trade of $230 per spread, and that is the most the trade can lose.
The estimated maximum profit is $270, but that could vary depending on changes in implied volatility.
The idea with the trade is that if Goldman Sachs stock remains around 340 for the next few weeks, the sold option will decay faster than the bought option. That allows the trade to be closed for a profit.
The Oct. 20 call should hold its value reasonably well because earnings are set for around Oct. 17.
The break-even prices for the trade are estimated at around 334 and 347, 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 Goldman Sachs Stock Trade
For a trade like this, I would set a profit target of 30%. And I would set a stop loss if Goldman stock breaks through either 330 or 350.
Goldman Sachs stock is ranked No. 11 in its industry group and has a Composite Rating of 63, and EPS Rating of 46 and a Relative Strength Rating of 52.
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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 Twitter at @OptiontradinIQ
