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The Calendar Spread is an option cash-flow technique that is loved by both pro option traders as well as the retail crowd to create a consistent monthly income.

The calendar spread is an option strategy that makes it’s money from the fact that options are an evaporation asset that loses it’s value over a period of time. decaying value. This is how the trade makes money. As expiration day approaches, the premium that was sold in the near month option loses it’s value – allowing the option trader to buy it back much cheaper than it was sold for.

Calendar spreads can be constructed from both call options and put options. To build a calendar spread position, one sells a closer month option at a particular strike – and then purchases a further out month option at the exact same strike. This spread makes money due to the fact that the value in the closest month option deteriorates at a quicker rate then the farther out month option. This difference in the value decay of the two different month options is what helps to create the profits in these trades.

Following is a made up example of a calendar spread place on SPY: Buy 1 Aug 105 call. Sell 1 Sept 105 call.

Now while in the example above the calendar position was created using joined together months, calendar spreads can also be created with a gap between the months.

For example, rather than constructing a calendar spread using Aug and Sept month options, it could be created using a Aug month option and an Oct month option – or a Aug month option an a Nov month option.

Usually this strategy is employed when the person trading it has a neutral outlook on the the vehicle being traded. These trades cal also be used in a more speculative way however – where the trader would place the calendar spread at the strike price he or she believes the underlying vehicle will be trading at on expiration day.

Since some option traders feel that the calendar spread is one of the most easiest option trades to manage, they like trading them better than some other option trades, like the iron condor, credit spread, and butterfly. Regardless, it really comes down to personal preference and in the end, all option traders would agree that this strategy is a wonderful technique to have in their ‘trade toolbox’.

Learn more about the calendar spread. Stop by David Harms’s site where you can find out all about this strategy as well as the credit spread and how to use these strategies to create a reliable monthly income.