Stocks & Commodities V. 22:4 (65): Explore Your Options by Tom Gentile
Q: I’m having a hard time understanding exactly how a calendar spread creates profit. Can you explain this technique in language that I can easily understand?
A: A calendar spread, also referred to as a time spread, is a “delta-neutral” (nearly risk-free) strategy. It is composed of both a long and a short position (hence the spread), using two calls or two puts that have the same strike price but expire on different dates. Ideally, in order to maximize the profit, you would like for the stock to finish at exactly that strike price. In Figure 1, you can see that the maximum profit of the calendar spread pictured is at the $25 level, which is the strike of both the long and short position.