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Options for Low Volatility: Setting Up and Rolling Calendars

November 16, 2017
Rolling: Options traders can consider calendars and roll them forward in low-vol situations
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Option traders interested in premium collection strategies—those that profit from time decay—often turn to short strategies such as iron condors or short verticals. These can be considered “credit” trades. But there are debit option strategies that also profit from time decay, such as the calendar spread. In this two-part series, we’ll look at calendars and how traders can set them up and roll them at expiration.

Calendars can be effective in times of low volatility, and potentially useful if you think a stock or ETF will trend sideways in the near term. 

The following, like all of our strategy discussions, is strictly for educational purposes only.  It is not, and should not be considered, individualized advice or a recommendation. Options trading involves unique risks and is not suitable for all investors. Please note that the examples below do not account for transaction costs or dividends. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any options trade. Transactions cost for trades placed online at TD Ameritrade are $6.95 for stock orders, $6.95 for option orders plus a $0.75 fee per contract. Orders placed by other means will have higher transaction costs. Options exercise and assignment fees are $19.99.

You can create a calendar by selling an at-the-money (ATM) option in a near-term expiration period, then buying the same option further out in time. Both options will decay, but the short, near-term option will decay faster than the long, further-out option. The net effect is a trade with positive time decay, which is how a calendar makes money.

To illustrate, here’s an example using theoretical option values (see table 1 below). Suppose you put on the July–June 50 call calendar by buying the July 50 call option with 60 days left for $3 and selling the June 50 call option with 30 days left for $2. The net cost of your calendar is $1 (three minus two = one). Now, as time passes, both options decay, but the shorter-term option decays at a faster rate.

Stock = $50
June: 30 days until expirationJuly: 60 days until expiration
Value of calendar
50 call$2$3$1
Table 1: CALENDAR TRADE. Theoretical prices for a 50 call calendar with 30-day and 60-day options.  For illustrative purposes only. Past performance does not guarantee future results.

Assume the stock closes 30 days later right at $50. Because the short option has expired, it’s worth zero, but the long option is still worth $2. See table 2. The calendar you bought for $1 is now worth $2, all thanks to the time decay of the short option.

Stock = $50
June: Zero days until expiration
July: 30 days until expiration
Value of calendar
50 call
Table 2: CALENDAR TRADE AT EXPIRATION. Theoretical prices for the July–June 50 call calendar 30 days later. For illustrative purposes only. Past performance does not guarantee future results.

In this example, the stock finishes right at the strike price of the calendar. That’s where calendar trades are worth the most. As the stock moves away from the strike in either direction, however, the calendar value drops. (See figure 1.) The P/L graph looks something like a tent, as maximum profits at the strike give way to lower profits sloping downward in both directions, eventually hitting breakeven points before finally losing full value. 

Calendar option spread profit/loss graph


Theoretical P/L graph for a call calendar. For illustrative purposes only. Past performance does not guarantee future results.

As the expiration of the short option nears, some traders may look to buy it to close, and simultaneously sell another short-term option with the same strike. This is called “rolling,” and it brings in a credit. The trader now has a new calendar to manage.

With the advent of weekly options, traders have the potential of rolling their calendars and netting a credit. Of course, that’s assuming the stock cooperates. We’ll take a closer look at setting up and rolling calendars in Part 2. 

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