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9 Weeks to Better Options Trading: The Power of Calendar Spreads


Veteran options trader Steve Smith breaks down this strategy.

Editor's note: To help investors profitably navigate the options market, Minyanville has launched "9 Weeks to Better Options Trading," an educational series aimed at increasing trader understanding of the nuts and bolts of options, with an emphasis on real-world applications. In this series, veteran options trader and author of OptionSmith, Steve Smith will demystify a range of topics from options pricing to trading strategies to special situations like earnings reports and takeovers.

In the past two weeks, we've gone over rookie mistakes to avoid as well as the basics of options pricing (see: 5 Rookie Mistakes to Avoid Like the Plague and An Options Pricing Primer). Now it's time to move on to trading methodologies, the first of which is calendar spreads.

Calendar spreads, which are also known as time spreads, are one of the most useful options strategies out there because they allow us to make directionally-biased trades at a lower cost basis than with outright purchases of puts or calls. Calendar spreads offer the hope-springs-eternal element that keeps us all coming back to trading options.

Supposedly, time is on our side, and the never-ending cycle of options expirations means we can keep rolling our positions forward, always chasing that perfect confluence of time and price. But that ain't the way I play it. I don't want to be beholden to time, or be led down some primrose path. If time doesn't make me money, I walk away and don't look back. But enough with the fanciful and back to the prosaic.
No positions in stocks mentioned.

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