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

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Veteran options trader Steve Smith breaks down this strategy.

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Editor's note: To help investors profitably navigate the options market, Minyanville is launching "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 (Click here for a two-week FREE trial and get Steve's best trading ideas in real time) Steve Smith will demystify a range of topics from options pricing to trading strategies to special situations like earnings reports and takeovers.

For the first article in the series, click here.

If you are a novice options trader, we suggest you start with Steve Smith's 6-Week Options Trading Kickstarter series.

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.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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