What is a Calendar Spread?
A calendar spread occurs when you are short (sell) a near month expiration contract, and buy a contract with a later expiration with the same strike price. Using this technique, you can take advantage of both the impact of volatility rising ahead of the actual news date, and the directional impact of the reaction in price of shares. You can also limit your exposure by adjusting the trade to a diagonal spread, meaning you could sell an out of the money call option in the front month, and purchase an in the money call option in the further expiration month (same applies to puts). Here’s a recent example of this strategy in action. In this case we’re using Acadia Pharma (ACAD), to execute a 1,000 contract calendar call spread. A trader sells the August $2.50 calls for $0.35 and buys the September $2.50 calls for $0.75 – a $0.40 debit. Currently the stock sells for around $2.00, so in this transaction the trader is betting on near term range trade with upside movement in September. The rea
