What is calendar spreads in option?

Calendar spreads

The traditional calendar spread it is considered or neutral strategy that attempts to benefit from the difference in how to time the iterations may occur over the life of an option. Considered a long calendar street near turn option would be sold while a longer-dated option may be purchased.the strike price of the two senses is usually very close to the level where the underlying is trading when the trade is initiated.

This is due to option with the strike price close to where the underlying stocks studying losing their time value at a faster rate than an option with more time to expiration.had the money options lose time value at an increasing magnitude as the expiration date approaches. A long calendar spread it will take advantage of these differences.

Industries of a calendar spread there is a trading decision to be made when the near date day option has expired. Ded decision may be to exist the option that is still held by the spirit possibly creates a new calendar displayed using the option position for just hold the option positions as a directional trade.

the greeks indicate how much and option value or other great changes related to a one-unit change in a price in a factor. when considering a calendar spread the price in the fact that is a focus is a time to option expiration specifically how the passage of time impacts the value of an option in the spread.the Greek that relates to how the passage of time impact and options value is theta. the unique feature of the heater is that for options that have a strike price very close to or at the same level as the underlying security the passage of time does not decrease the option's value at a linear rate.

Long call calendar

Long call calendar a spirit consists of a long position in an option that has a longer to expiration than a corresponding sort option. both call options have the same strike price and underlying the only difference is the time to expiration. Simple transactions to create a long call calendar spread would be

Buy 1 August 50 cal at 2.50 for 90 days to expiration.

Sale 1 June 50 cal at 1.45 for 30 days to expiration.

The net result of these two traits is a long call calendar spread with the short-legged expiring in 30 days on June expiration.8 June expirations the August call option will still have 60 days left until expiration. The underlying stock in this example was priced at 50 when the trade was initiated. Therefore with all pricing factor testing the same, this August 50 cal would have a value of about 2.05 while the June 50 call would expire with no value.