From Barchart:

A calendar spread is a type of option trade that consists of selling a short-term option and buying a longer-term option with the same strike. This strategy allows traders to take advantage of time decay and volatility changes. It can be a way to profit from a stock’s price staying within a certain range.

The spread’s profitability depends on the relationship between the premiums of the short-term and long-term options. If the short-term option’s premium is higher than the long-term option’s, the spread can be profitable. However, if the short-term option’s premium is lower, the spread may result in a loss.

Calendar spreads can also be used to hedge downside risk on a stock. For example, if you own a stock and want to protect against a potential drop in price, you can sell a short-term call option and buy a longer-term call option with the same strike. This would allow you to offset potential losses if the stock price were to decrease.

Overall, calendar spreads can be a versatile and effective strategy for option traders looking to profit from time decay and volatility changes, as well as hedge against downside risk. It is important to carefully consider the relationship between the premiums of the short-term and long-term options in order to maximize profitability.



Read more: Smart Option Strategies: Calendar Spread Screener Results for January 24th