Calendar construction from exercise style, time budget, and carry

Three construction inputs

The archive described listed options by exercise style, by how fast time premium eroded, and by interest and dividends already inside the quote. A calendar-spread sold a nearer-dated option against a longer-dated option.

TradersWeek editorial reading: treat that material as a three-input construction problem. Assign the short leg an exercise style that blocks or allows early exercise. Convert each quoted premium into a monthly time budget instead of a cheaper ticket. Read interest-and-dividend carry as already sitting inside the call or put price.

Exercise style on the short leg

A European-style option can be bought or sold before expiration but cannot be exercised until expiration. An American-style option can be exercised on any date before expiration. Listed US equity options were described as almost entirely American-style, while most index options were European-style.

European-style options were described as typically richer than comparable American-style options because early exercise is blocked. The archive framed a calendar as selling a short-dated European-style option against a longer American-style long, using paired Standard & Poor's 100 listings as the example. Early-assignment is exercise of an American-style short option before expiration, a path European-style shorts do not have.

Settlement and liquidation

American-style options were described as settling on the Saturday after Friday expiration. European-style options were described as settling on the Friday they expired, with any needed liquidation framed as occurring on the prior Thursday.

A monthly time budget

Short-dated options were described as cheaper in cash outlay but faster to lose time value than longer-dated options over comparable intervals. Time-decay was described as steeper for shorter remaining life, and most of an option's time premium was described as decaying in the final 30 days.

In a historical hypothetical with the underlying at 30, at-the-money calls were 2.00 for December, 3.00 for January 2004, and 4.50 for April 2004, equal to monthly time costs of 2.00, 1.50, and 0.90. TradersWeek editorial reading: the lower cash ticket was not the lower monthly time budget.

Carry already in the price

Call cost-of-carry was defined as the risk-free interest rate minus the dividend over remaining life. Put time value was described as assuming the dividend minus the interest rate.

Rising interest rates were described as increasing call premiums because assignment of a written call creates a short stock position that earns interest, and that interest is embedded in the call's time premium. TradersWeek editorial reading: carry is not a separate add-on. It already sits inside the quoted call or put.