3 Calendar Spread Trade Ideas For This Friday

Calendar spreads are an option trade that involves selling a short-term option and buying a longer-term option with the same strike.

Traders can use calls or puts and they can be set up to be neutral, bullish or bearish with neutral being the most common.

When doing bullish calendar spreads, we typically use calls to minimize the assignment risk. Likewise, if the calendar is set up with a bearish bias, we use puts.

Neutral calendars can use calls or puts, but calls are more common.

Let’s look at a couple of examples, using Exxon Mobil (XOM), Microsoft (MSFT) and Goldman Sachs (GS)

XOM Neutral Calendar Spread

Let’s use XOM stock for our first calendar spread example.

With Exxon Mobil stock trading around 110, setting up a calendar spread at 110 gives the trade a neutral outlook.

Selling the March 17 call option with a strike price of 110 will generate around $480 in premium, and buying the April 21, 110 call will cost approximately $645.

That results in a net cost for the trade of $165 per spread, and that is the most the trade can lose.

The estimated maximum profit is $255, but that could vary depending on changes in implied volatility. 

The idea with the trade is that if XOM stock remains around 110 for the next few weeks, the sold option will decay faster than the bought option allowing the trade to be closed for a profit.

The breakeven prices for the trade are estimated at around 104 and 118, but these can also change slightly depending on changes in implied volatility.

In terms of trade management if XOM broke through either 104 or 118, I would look to adjust or close the trade.

Let’s look at another example.

MSFT Neutral Calendar Spread

With Microsoft stock trading around 360, setting up a calendar spread at 360 gives the trade a neutral outlook.

Selling the March 17 call option with a strike price of 260 will generate around $1,185 in premium, and buying the April 21, 260 call will cost approximately $1,545.

That results in a net cost for the trade of $360 per spread, and that is the most the trade can lose.

The estimated maximum profit is $530, but that could vary depending on changes in implied volatility. 

The idea with the trade is that if MSFT stock remains around 260 for the next few weeks, the sold option will decay faster than the bought option allowing the trade to be closed for a profit.

The breakeven prices for the trade are estimated at around 248 and 277, but these can also change slightly depending on changes in implied volatility.

In terms of trade management if MSFT broke through either 248 or 277, I would look to adjust or close the trade.

GS Neutral Calendar Spread

With Goldman Sachs stock trading around 365, setting up a calendar spread at 365 gives the trade a neutral outlook.

Selling the March 17 call option with a strike price of 365 will generate around $1,345 in premium, and buying the April 21, 365 call will cost approximately $1,875.

That results in a net cost for the trade of $530 per spread, and that is the most the trade can lose.

The estimated maximum profit is $660, but that could vary depending on changes in implied volatility. 

The idea with the trade is that if GS stock remains around 365 for the next few weeks, the sold option will decay faster than the bought option allowing the trade to be closed for a profit.

The breakeven prices for the trade are estimated at around 350 and 385 but these can also change slightly depending on changes in implied volatility.

In terms of trade management if GS broke through either 350 or 385, I would look to adjust or close the trade.

Mitigating Risk

Thankfully, calendar spreads are risk defined trades, so they have some build in risk management. Position sizing is crucial to ensure that minimal damage is done if the trade suffers a full loss.

One way to set a stop loss for a calendar spread is close the trade if the loss is 20-30% of the premium paid. 

Calendar spreads can also contain early assignment risk, so be mindful of that if the stock breaks through the short strike and it’s getting close to expiry.

Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

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