Long calendars happen to be my favorite time spread. For the most part, I like to sell the current week’s expiration and buy the following week’s expiration. If you are not familiar with them, long calendars consist of selling a call or put and buying another call or put with the same strike but a longer expiration. I like to initiate them early in the week, say, Monday or Tuesday. Positive theta is the main source of potential income for this position, but I like to look at it a little differently.

Vertical Credit Spread Comparisons

I often describe calendars by comparing them with vertical credit spreads like bull puts and bear calls. Instead of buying a lower strike put for a bull put or a higher strike call for a bear call, an option trader buys a longer expiration option to protect the short option. The difference is, for the long calendar, you do not want the underlying to move too far away from the strike price. The positive theta starts to diminish, and the delta starts to grow in the wrong direction thanks to negative gamma. For a bull put spread as an example, it does not matter how high the underlying goes above the short put strike because the spread will continue to profit from positive delta and theta.

Delta and Calendars

As mentioned already, the biggest benefit for long calendars is positive theta. The positive theta from the short option has a larger theta than the long option, which has negative theta. This positive theta can offset some positive or negative delta risk as the underlying moves higher or lower. If the underlying is around the short strike for a calendar, delta should be close to neutral. But as it goes higher or lower, positive or negative delta will surface. As mentioned above, the more it moves away, the more significant delta becomes, and the smaller positive theta becomes. It is like losing your edge on the trade.

Theta Lesson

As a reminder, theta is highest at-the-money (ATM) and it is also greatest between expirations when the underlying is ATM too. So, the positive theta edge will diminish when the underlying wanders too far away and it limits its ability to offset delta.

I Love Calendars

I always try to push option traders to learn about or trade more calendars including double calendars. I truly believe it is a remarkable strategy. The more you know about them, I think the more you will be inclined to consider them. Hopefully this blog has reminded you or piqued your interest.

John Kmiecik, Market Taker Mentoring