CALENDAR SPREAD
SELL NEAR
MONTH OPTION
BUY FAR
MONTH OPTION
As it name suggests
it spreads over the calendar month, hence it is known as calendar spread. The
logic behind calendar spread is, near month options price will fluctuate more
than far month. So, in calendar spread we take benefit out of this.
Calendar spread can be of many
types. If it has made using call option it is called Calendar Call Spread, same
way for put it is known as Calendar Put Spread. If the Calendar Spread is made
of different month’s expiry and same strike price is called Horizontal Calendar
Spread. At the same time options with different strike price is known as
Vertical Calendar Spread.
Market Scenario: Neutral
Risk: Limited
Reward: Limited
EXAMPLE:
The example of Calendar spread
is given below. Here we are using the same strike price so it is Horizontal
Calendar Spread.
SPOT
|
5000
|
STRIKE
|
5100
|
Current Expiry is Oct. So we are
Buying the option of Dec i.e. Far Month and Selling the Option of Nov i.e. Near
Month.
|
NOV - BUY
|
DEC – SELL
|
5100
|
198.13
|
252.48
|
Time to Expiry
|
2 Month
|
3 Month
|
Spread
|
54.35
|
|
Here after one month of
purchase, the position of options will be like this:
|
OCT
|
NOV
|
5100
|
124.95
|
198.13
|
Time to Expiry
|
1 Month
|
2 Month
|
Spread
|
68.18
|
|
Here our Spread has been
increased from 54.35 to 68.18 considering the same spot.