A calendar spread, also known as a time spread or horizontal spread, is a strategy in futures and options trading. It involves simultaneously entering a long and short position on the same underlying asset but with different delivery dates. In a typical calendar spread, one would buy a longer-term contract and go short a nearer-term option with the same strike price. If two different strike prices are used for each month, it is known as a diagonal spread. Calendar spreads are sometimes referred to as inter-delivery, intra-market, time spread, or horizontal spreads. Using calendar spreads on a monthly/ًweekly basis has several advantages. These spreads are designed to make money if the stock changes by less than a dollar on Friday. They allow traders to take advantage of elevated premium in near-term options with a neutral market bias. A calendar spread is most profitable when the underlying asset does not make any significant moves in either direction until after the near-month option expires. This strategy can be improved by anticipating various volatility levels of derivatives at different periods, having controlled risk in either direction. The goal is to profit from time and volatility, so the strike price should be as near as possible to the underlying asset’s price. With correct implementation and continuous monitoring, using calendar spreads on a monthly/ًweekly basis can lead to improved profits.
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