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How I Trade Calendar Spreads

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A calendar spread is simply buying a far-month option and then selling a near-month option at the same strike price. Part of the rationale is that the time erosion of the near month is usually greater than the time erosion of the long month. The net result is a time erosion gain every day you are in the trade. Calendar spreads are also called horizontal spreads. Here is an example of a calendar spread:

Sell to open September 40 call.

Buy to open October 40 call.

My exit strategy is somewhat unique. The first thing to understand about a calendar spread is that the profit peaks at the common strike price. Higher than the strike price you start to give it back and lower than the strike price you start giving it back. To me this says the optimal place to exit is exactly at the strike price. I call this exit strategy my stop profit strategy. Remember it is based on the stock price and not the option prices. Using this exit strategy will also make it more likely that your trade will be profitable.

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