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Why I Like Calendar Spreads:
The basic reason I like calendar spreads (aka time spreads) is that they allow you to make extraordinary gains compared to owning the stock if you are lucky enough to trade in a stock that stays flat or moves moderately higher.
I get a real kick out of making serious gains when the stock just sits there and doesn’t do anything. Calendar spreads almost always do extremely well when nothing much happens in the market.
While I call them calendar spreads, if you look at the actual positions that we hold in our portfolios, you will see that the long calls we own are not always at the same strike prices as the short calls we have sold to someone else. That makes them diagonal spreads rather than calendar spreads, but they operate exactly the same as calendar spreads.
With both calendar and diagonal spreads, the long calls you own decay at a slower rate than the short calls that you have sold to someone else, and you benefit from the differences in decay rates. Both spreads do best when the stock ends up precisely at the strike price of an expiring option. At that point, the short options expire worthless and new options can be sold at a further-out time series at the maximum time premium of any option in that series.
If you have sold short options at a variety of strike prices you can make gains over a wider range of possible stock prices. We use the analyze tab on the free thinkorswim software to select calendar and diagonal spreads which create a risk profile graph which provides a break-even range that lets us sleep at night and will yield a profit if the stock ends up within that range. I encourage you to try that software and create your own risk profile for your favorite stock, and create a break-even range which you are comfortable with.
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Any questions? I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts. seth@terrystips.com
You can see every trade made in 8 - 10 actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here. Why wait any longer to make this important investment in yourself?
Even better, you can become a Terry’s Tips Insider, and receive all our educational reports and materials absolutely free by opening a new account at the best options broker around - thinkorswim. If you open an account with our link, they will give you 60 days of free trading or up to $600, the same deals they give to everyone who opens an account with them. You must use this link to sign up - open thinkorswim account – and once you have funded your account with at least $3500, email Seth@TerrysTips.com and let him know that you have done it, and this is what he will do – sign you for our Premium Service package ($119.95 value plus an extra 4 months of our Premium Service, valued at another $190.80). You get $300.65 worth of services without paying us one penny.
I look forward to having you on board, and to prospering with you.
Terry
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