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 Disney (DIS), Apple (AAPL) and Microsoft (MSFT)

DIS Neutral Calendar Spread

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

With Disney stock trading around 95, setting up a calendar spread at 95 gives the trade a neutral outlook.

Selling the July 15 call option with a strike price of 95 will generate around $265 in premium, and buying the August 19, 95 call will cost approximately $560.

That results in a net cost for the trade of $295 per spread, and that is the most the trade can lose.

The estimated maximum profit is $200, but that could vary depending on changes in implied volatility. 

The idea with the trade is that if DIS stock remains around 95 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 90 and 100, but these can also change slightly depending on changes in implied volatility.

In terms of trade management if DIS broke through either 90 or 100, I would look to adjust or close the trade.

Let’s look at another example.

AAPL Neutral Calendar Spread

With Apple stock trading around 135, setting up a calendar spread at 135 gives the trade a neutral outlook.

Selling the July 15 call option with a strike price of 135 will generate around $495 in premium, and buying the August 19, 135 call will cost approximately $910.

That results in a net cost for the trade of $415 per spread, and that is the most the trade can lose.

The estimated maximum profit is $300, but that could vary depending on changes in implied volatility. 

The idea with the trade is that if AAPL stock remains around 135 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 128 and 153, but these can also change slightly depending on changes in implied volatility.

In terms of trade management if AAPL broke through either 128 or 153, I would look to adjust or close the trade.

Let’s look at our last example.

MSFT Neutral Calendar Spread

With Microsoft stock trading around 255, setting up a calendar spread at 255 gives the trade a neutral outlook.

Selling the July 15 call option with a strike price of 255 will generate around $790 in premium, and buying the August 19, 255 call will cost approximately $1,455.

That results in a net cost for the trade of $665 per spread, and that is the most the trade can lose.

The estimated maximum profit is $500, but that could vary depending on changes in implied volatility. 

The idea with the trade is that if MSFT stock remains around 255 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 244 and 268, but these can also change slightly depending on changes in implied volatility.

In terms of trade management if MSFT broke through either 244 or 268, 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.

*Disclaimer: On the date of publication, Steven Baster did not have (either directly or indirectly) positions in some of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, June 30, 2022.

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