Why I buy vertical option spreads instead of calendar spreads -- Options trading strategies
welcome to looking at the markets with David Moadel
today's topic is why I by vertical option spreads instead of calendar
spreads
these are both very popular choices vertical spreads and calendar spreads so
let's talk about the similarities and differences and why i prefer one over
the other
let's do a quick review when buying calls or puts I often like to make it a
spread by also selling calls or puts this helps to reduce the cost of the
calls or puts and it can also reduce the negative impact on my account
if the trade goes against me for a while now in a vertical spread your buying and
selling the same number of options and they have the same expiration date
the only difference is the strike prices
personally I prefer to buy and in the money option and sell and out of the
money option now in a calendar spread your buying and selling the same number
of options
just like with the vertical spread and the strike prices are the same
however the expiration dates are different
typically you would buy an option with more time until expiration
that's a longer dated option and you would sell an option with less time
until expiration
so typically in a calendar spread your buying a longer dated or further out
dated option and then to offset the cost you would sell an option
that's shorter-dated or shorter time until expiration
well here are some reasons why i prefer the vertical spreads over the calendar
spreads
first of all vertical spreads are simple
whenever possible I like to keep my investments simple calendar spreads
require you to think in terms of two different time periods because you're
dealing with two different expiration dates on the other hand with vertical
spreads the end date for your trade is perfectly clear
you're only dealing with one expiration date and every part of your trade is
geared toward that date
yes so when you buy a vertical put spread or vertical call spread
it's kind of like a coupon it has that one expiration date
you don't have to think about well the the call that i bought has this
expiration date
but the one call that i sold has this other expiration date
you kind of have like this time warp thing going on with calendar spreads
with vertical spreads you keep it simple one expiration date
you can mark it on your calendar and keep it simple
other difference vertical vertical spreads let you buy in the money and
sell out of the money
remember with vertical spreads you have two different strike prices with
calendar spreads you do not
I prefer to buy in the money options which I considered to be higher quality
I really like the in the money options when i buy and sell out of the money
options which i consider to be lower quality and i'll explain that did it
if you have experience buying in the money options and out of the money
options
I'm sure you've noticed that time decay really hurts out of the money options
much more quickly than in the money options
ok and so for that reason I prefer to buy options that are in the money and if
i'm going to sell an option
I want to sell out of the money options because i want the time decay to have a
really strong negative impact on those out of the money options that i'm
selling so that's why buy money by in the money and sell out of the money and
this is possible with vertical spreads but it's not possible if you only use
calendar spreads
if you only use calendar spreads then the strike prices of the bought and sold
options would need to be exactly the same
yeah so with calendar spreads if you're just using calendar spreads then you
can't buy and in the money option and selling out of the money option that's
not a strategy you can use but you can use that with vertical spreads and
here's another difference
calendar spreads can be disappointing
sometimes in life you get lucky you buy a call spread and the market goes up a
lot in the next few days or maybe you buy a put spread and the market goes
down a lot in the next few days
it's nice when that happens right well with calendar spreads the results can be
disappointing if the market quickly goes the way you hoped it would go profits
can be minimal
especially in the beginning the benefits of calendar spreads often are not
realized until later on when the option that you sold expires and that could be
months away
on the other hand vertical spreads are often a better choice
if you're not planning to hold your position until expiration
personally I prefer to take profits and liquidate or get rid of my option
spreads long before the expiration date
so here's the takeaway
I like to keep my option trades simple
I prefer to buy in the money and sell out of the money options and I try not
to hold on to my option spreads for too long
for these reasons vertical spreads are my trade of choice over calendar spreads
so i hope i built up a good case for vertical spreads over calendar spreads
and not to say that calendar spreads are not a viable option
you know they're great and they're fine but I'm just letting you know my
preference and giving you something to think about
so if you'd like more help with options
stocks trading investing or finance in general please feel free to contact me
by email anytime
my email address is David Modell @ gmail.com
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