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 Option
Trading – Calendar Spreads & Time Decay |
When
traders speak of putting on calendar spreads, they normally refer
to buying the further month options and selling the closer month
option. While I can not argue with this, it is not best for all
options.
I am going to be general in this article because prices change
and I don’t want to cause confusion.
For out of the money options, you might want to consider doing
the opposite. Buy the close month and sell the further month.
This is because the theta is advantageous to you if you are buying
the front month. The further the months are from each other, the
more you have an advantage. Also, figure out the price per day
of the option. Which option costs more and which is cheaper per
day. You can find options that are equal distance away in strike
from the futures but one option is 3 times cheaper per day than
the other.
For the at the money options, the regular calendar spreads are
the way to go. For strike prices that are far out of the money,
the reverse calendar spread is better. One reason is the theta
advantage. Another is the price per day.
So keep your eyes open for out of the money options and check
their price per day and theta and compare them to different months.
If you are looking at different months, make sure that the month
you are thinking of selling, is the same amount of strike prices
away or more from the underlying, as the one you sell. Meaning,
if you buy an option that is 5 strikes away from the underlying,
the one you sell, should be at least 5 strike prices away from
the underlying. This is so if there is a big move, both options
will be in the money at roughly the same time.
David Rivera has traded commodities and options for one of the
largest cash trading firms in the world. He has written a course
on futures options techniques.
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