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What is a calendar spread option strategy?
The calendar spread option strategy consists of purchasing a call option long-term and selling a call option short-term derived from the same financial instrument with the same exercise price but a different expiration date. In other words, traders try to benefit from the anticipated differences between time transit and options volatility.What is double calendar spread & reverse calendar spread?
Double Calendar Spread – It involves buying future months’ call and put options and selling near-month calls and puts with the same strike price. Reverse Calendar Spread – It acts reversely, wherein the traders take an opposite position. They sell a longer-term option and buy a short-term option on the same underlying security.When should you use a long calendar spread?
A long calendar spread is a good strategy to use when you expect the price to be near the strike price at the expiry of the front-month option. This strategy is ideal for a trader whose short-term sentiment is neutral. Ideally, the short-dated option will expire out of the money. Once this happens, the trader is left with a long option position.What is the difference between a short straddle and a calendar spread?
A calendar spread has a similar shaped payoff diagram to a short straddle but the maximum loss is limited whereas the maximum loss on the short straddle is theoretically unlimited. With a calendar spread, the underlying stock would need to make a pretty big move for the trade to suffer a full loss.