Options for Low Volatility: Setting Up and Rolling Calendars

Calendar option spreads can be effective during times of low volatility. Here’s how to get started trading and rolling them.

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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
$0$2$2
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

FIGURE 1: CALENDAR OPTION SPREAD PROFIT/LOSS.

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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Please note that the examples above 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.

Spreads and other multiple-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return. These are advanced option strategies and often involve greater risk, and more complex risk, than basic options trades.

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Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

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