Delving into the complex world of trading, investors often encounter intricate strategies like calendar spreads. This option trade involves selling a short-term option while simultaneously purchasing a longer-term option with the same strike price.
Traders can choose between calls or puts and may adopt a neutral, bullish, or bearish stance, with neutrality being the most prevalent position.
When embarking on bullish calendar spreads, traders typically opt for calls to minimize assignment risk. Conversely, for bearish-biased calendars, puts are preferred.
In the case of neutral calendars, both calls and puts can be utilized, with calls being the more common choice.
To provide a clearer insight into this trading strategy, let’s explore some examples using JP Morgan Chase (JPM), Netflix (NFLX), and Goldman Sachs (GS).
A Balancing Act with JPM’s Neutral Calendar Spread
Our first example focuses on JPM stock.
With JP Morgan Chase trading around $200, establishing a calendar spread at this price point indicates a neutral outlook.
By selling the April 19 put option with a $200 strike, traders can generate approximately $375 in premium. Simultaneously, buying the May 17, $200 call comes at a cost of around $580.
This results in a net cost for the trade of $205 per spread, representing the maximum potential loss. The estimated maximum profit stands at $365, subject to fluctuations in implied volatility.
The aim of this trade lies in capitalizing on JPM’s stability around $200. The decay of the sold option relative to the bought option is essential for closing the trade profitably.
The breakeven prices are estimated around $191 and $212, though these figures may vary with changes in implied volatility.
Regarding trade management, breaching either $191 or $212 would prompt a reassessment or potential closure of the trade.
It’s worth noting that JP Morgan Chase is scheduled to report its earnings on April 12.
Let’s now shift our focus to another illustration.
The Art of Neutrality: A Glimpse into NFLX’s Calendar Spread
Considering Netflix’s stock at approximately $630, configuring a calendar spread at this level indicates a neutral stance.
By selling the April 19 call option with a $630 strike, investors can secure around $2,840 in premium. Concurrently, purchasing the May 17, $630 call entails a cost of roughly $3,840.
This translates to a net cost of $1,000 per spread, representing the maximum potential loss. Anticipated maximum profit hovers around $2,360, contingent upon shifts in implied volatility.
The strategy here hinges on NFLX’s stability around $630, with the aim of closing the trade profitably by leveraging the decay of the sold option compared to the bought option.
Breakeven prices are projected around $570 and $715, subject to fluctuations in implied volatility. Similar to other trades, breaching either $570 or $715 would necessitate adjustments or potential closure of the position.
Netflix is slated to report its earnings on April 18.
Striking a Balance: GS’s Neutral Calendar Spread
Turning our attention to Goldman Sachs’ stock at approximately $410, establishing a calendar spread at this price level indicates a neutral perspective.
By selling the April 19 call option with a $410 strike, investors stand to gain around $940 in premium. Conversely, purchasing the May 17, $410 call involves a cost of about $1,470.
This translates to a net cost of $530 per spread, representing the maximum potential loss. Anticipated maximum profit stands at $690, subject to variations in implied volatility.
The strategy here relies on GS’s stability around $410, aiming to close the trade profitably by leveraging the decay of the sold option relative to the bought option.
Breakeven prices are estimated around $393 and $432, contingent upon shifts in implied volatility. As with other trades, breaching either $393 or $432 would prompt adjustments or potential closure of the position.
Goldman Sachs is expected to report its earnings on April 15.
Navigating Risk Mitigation
Fortunately, calendar spreads offer defined risk profiles, providing inherent risk management capabilities. Proper position sizing is crucial to mitigate potential losses in the event of trade failure.
A suggested method for implementing a stop-loss in a calendar spread involves closing the trade if the loss amounts to 20-30% of the premium paid.
It’s vital to bear in mind that calendar spreads may entail early assignment risk. Traders should exercise caution if the stock approaches the short strike and nears expiry.
While options trading carries inherent risks, potentially leading to a complete loss of investment, this article serves as an educational resource rather than a trading recommendation. Always conduct thorough due diligence and seek advice from a financial advisor before making investment decisions.
At the time of publication, Gavin McMaster did not hold any positions (directly or indirectly) in the securities mentioned in this article. The information provided herein is purely for informational purposes. For additional details, refer to the Barchart Disclosure Policy.
The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the views of Nasdaq, Inc.
