Calendar spreads are an option trade that involves selling a short-term option and buying a longer-term option with the same strike.
Traders can use calls or puts and they can be set up to be neutral, bullish or bearish with neutral being the most common.
When doing bullish calendar spreads, we typically use calls to minimize the assignment risk. Likewise, if the calendar is set up with a bearish bias, we use puts.
Neutral calendars can use calls or puts, but calls are more common.
Let’s take a look at Barchart’s Long Call Calendar Screener for October 18th.
I have added a filter for Market Cap above 40b and total call volume above 2,000 to remove small capitalization stocks.
The screener shows some interesting calendar spread trades on popular stocks such as NVDA, AVGO, LULU, META, LLY, ADBE, PANW and TSLA. Let’s walk through a couple of examples.
NVDA Calendar Spread Example
Let’s use the second line item as an example.
With Nvidia stock trading at $439.38, setting up a calendar spread at $440 gives the trade a neutral outlook.
Selling the October 20 call option with a strike price of $440 and buying the December 15, $440-strike call will cost around $2,950. That is also the most the trade can lose.
The estimated maximum profit is $650, but that could vary depending on changes in implied volatility.
The idea with the trade is that if NVDA stock remains trades around $440 for the next few days, the sold option will decay faster than the bought option allowing the trade to be closed for a profit.
The breakeven prices for the trade are estimated at around $427.50 and $456, but these can also change slightly depending on changes in implied volatility.
In terms of trade management if NVDA broke through either $427 or $456, I would look to adjust or close the trade.
Let’s look at another example.
META Calendar Spread Example
With Meta Platforms stock trading at $324, traders could sell the $320-strike October 20th call and buy the $320-strike December 15th call.
That results in a net cost for the trade of $1,895 per spread, and that is the most the trade can lose.
The estimated maximum profit is $380, but that could vary depending on changes in implied volatility.
The breakeven prices for the trade are estimated at around $313 and $3298 but these can also change slightly depending on changes in implied volatility.
TSLA Calendar Spread Example
The last example we will look at is on Tesla stock.
With TSLA stock trading at $254.85, traders could sell the $255-strike October 20th call and buy the $255-strike December 15th call.
That results in a net cost for the trade of $1,360 per spread, and that is the most the trade can lose.
The estimated maximum profit is $700, but that could vary depending on changes in implied volatility.
The breakeven prices for the trade are estimated at around $241 and $274 but these can also change slightly depending on changes in implied volatility.
Mitigating Risk
Thankfully, calendar spreads are risk defined trades, so they have some build in risk management. Position sizing is crucial to ensure that minimal damage is done if the trade suffers a full loss.
One way to set a stop loss for a calendar spread is close the trade if the loss is 20-30% of the premium paid.
Calendar spreads can also contain early assignment risk, so be mindful of that if the stock breaks through the short strike and it’s getting close to expiry.
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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
