Calendar Spread

Delta. Gamma. Rho. Theta. Vega. There are a lot of Greek inputs to calculate for the various impacts on an option's price. There are also ways to trade some of the various inputs. For example, say two call options have the same strike and the same underlying asset. What's the third component that you could trade between these two?

Yes!

That's not it. The exercise prices won't be different, because the strikes are the same.

You can trade the time component of a call or put option by selling a near-dated option and buying a longer-dated option on the same underlying with the same strike. It's called a __calendar spread__. When you buy the more distant option, you are executing a long calendar spread, and when you buy the near-term option and sell a longer-dated one, you're executing a short calendar spread.

In setting up a calendar spread, you're trying to take advantage of the natural expiration that occurs when the contract reaches maturity. That's especially true for option contracts because the value component can be broken down into two parts—the underlying price component and the time component. What characteristic of options are you trying to monetize?

For example, say that Edmunds Group (EDG) is rumored to be announcing a new patent within the year, and you believe that the price of EDG will remain relativity flat at EUR 50 until the announcement. You decided to initiate a calendar spread by selling a three-month EUR 55 call option for EUR 2.50 and buying a nine-month EUR 55 call at EUR 5.30. After three months, EDG is trading at EUR 52. What's the value of the short call?

That's it!

No. You'd use a spread strategy to trade volatility.

Clearly, you'd want to monetize the time decay for an option. That's because the time-value portion of the option decreases as the option gets closer to the expiration. A near-dated call would have a faster time decay than a longer-dated option.

That's not it. The strike was above the expiration.

No. The premium doesn't impact the option's worth.

Way to go! It's worthless. You'd get to keep the EUR 2.50 premium, and if you believe that EDG will continue to trade relatively flat, you can extend the calendar spread strategy over various time periods. The goal is to capture the value of the time decay by selling call options that have a high probability of expiring worthless.

To sum it up: [[summary]]

Time

The difference in exercising prices

Time decay

Volatility spreads

EUR 0

EUR 2

EUR 2.50

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