A calendar spread is a relatively low risk trade which seeks to profit from the different time erosion values of options with different expiration months. An example of a calendar spread is the following:
Sell to open 1 July 50 call.
Buy to open 1 August 50 call.
Notice that both strikes are the same and the two options share a common strike. The general idea behind the strategy is that the July option is expected to lose time value faster than the August option. Thus it should profit from the relative difference in time erosion between the two options.
However one is cautioned to check that the time erosion on the nearby option will actually lose time value faster than the farther out option. To check this, always use an options calculator such as the one at the CBOE website. I think of the farther out option as a protective option which controls your risk. As a result of this hedge the risk is strictly limited to the small debit amount that you paid to enter this position.
The peak profit will be achieved when the stock is trading at the common strike price. That is the time to exit because you will be giving money back if the stock moves up or down from that point forward.
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