ODDS Online 7.0 can analyze any strategy that you can think of, including calendar spreads.  But there are a couple of important things to know about calendar spreads before you make such a trade.  First, calendar spreads are where you buy an option of a certain type (call or put) in one month, and then sell an option of the same type in a different month.

 You can buy a front-month call and sell a longer dated call, or you can sell a front-month and buy a longer-dated one.  You can also do either of these strategies for puts.

 Let’s look at the former: buying a front-month call and selling a longer-dated call.  This is a VERY MARGIN INTENSIVE STRATEGY, and here’s why.  As long as you’re holding both options, the position is “covered”.  The front-month covers the longer-dated.  If, however, the one of the options is closed out, it is no longer a spread and the remaining option becomes an uncovered position.  This isn’t a problem if you close out the call option you sold, because the remaining position is a long call.  But if you have this type of calendar spread on and the front-month expiration arrives, and for some reason you don’t remove the spread prior to the close that expiration Friday, then the front-month option will expire leaving you with a short call the next trading day.  That leaves you with an unlimited risk short call that could result in disaster.

 Because of that potential, the exchanges consider a calendar credit spread to be an uncovered position.  And because of that, the margin is calculated in the following manner: you fully pay for the front-month call you buy, and you fully margin the short call you sell as if it were a naked short call.  THIS IS AN EXTREMLY EXPENSIVE PROPOSITION, and it is a strong deterrent for individuals contemplating the calendar credit spread strategy.

 That’s why most people trade calendar debit spreads where they sell the front-month option and buy the back-month.  In this instance, as long as the strike prices are the same (if they were different strikes, the calendar spread would be called a diagonal), the margin and the risk is the debit.  For instance, if a May 50 call is bid 3 and the June 50 call is ask 5, then the net cost would be 2.  Therefore, the out-of-pocket expense to you would only be $200.  That is also your maximum risk as long as you close out the position before expiration.

 Because the lower cost of calendar debit spread, most people look to implement this version.  The thing is, the volatility difference between the months is almost always unfavorable for the strategy.

 Think of it this way: a calendar spread is designed to profit from a difference in implied volatilities between two expiration cycles.  You want to buy the cheap implied volatility, and sell the expensive implied volatility.  Typically, the front-month implied volatility is LOWER than the back-month.

 That means the most common calendar spread you are likely to find is where you buy the inexpensive front-month and sell the expensive back-month.  The problem, as noted above, is that this is the MARGIN INTENSIVE calendar spread.  That’s not to say it’s bad.  It’s just that most individuals can’t afford to do this kind of spread, or they can’t qualify for it.

 It is very rare that you find situations where the front-month implied volatility is high and the back-month is low.  The typical reason is that there is some underlying reason, such as an impending FDA decision.  For that reason, it is very rare that you find good, high quality calendar debit spreads.

 And if you do find a calendar debit spread situation, be sure to check the news to make sure that there is not some unexpected event that might be causing the volatility difference.  Because the event may be such that, in the real world, our statistical analysis isn’t factoring in that “event risk”.

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