Calendar spreads as range overlays with wing repairs

When short-horizon direction was treated as unreliable

After a run of failed index rallies from September 2000, same-strike calendars were presented as a way to stay involved when short-horizon direction was treated as unreliable, including on more volatile names.

Each illustrated calendar-spread used one strike and two expirations, buying the later option and selling the nearer option, and could be given a bullish, bearish, or neutral tilt.

The calendar-spread and its debit

A calendar-spread pairs same-strike options in two expirations, with the later contract held long and the nearer contract sold so near-term decay can work against the short leg.

The stated loss limit on those calendars was the option-spread-debit, the net cash paid to open the multi-leg structure. In the examples that debit was treated as the defined loss if price left the intended window.

Implied-volatility-term-structure first

Example selection favored front-month implied volatility that was unusually high while later-month implied volatility was low to normal.

That implied-volatility-term-structure comparison of front-month versus later-month implied volatility was used to judge whether a calendar debit was rich or cheap.

A range-neutral CSCO put calendar

One illustrated range-neutral CSCO put calendar bought the October 22.5 put and sold the June 22.5 put for a 1.5 debit.

The plotted payoff peaked at 22.50 and stayed positive between 19 and 28, the range-payoff-window around the chosen strike.

A downside-tilted CSCO calendar

An illustrated downside-tilted CSCO calendar bought September 15 puts and sold August 15 puts. The plotted payoff peaked at 15, and that peak was described as arriving only after the short option expired.

If CSCO rallied, the short 15 puts could be repurchased cheaper, leaving long puts that could be held, used to sell later premium, or overlaid with a new calendar at a higher strike. If price was little changed into short-put expiry, the out-of-the-money short puts were described as decaying toward worthless while the long puts still held time value.

A dual-wing-calendar on a wide-swinging name

For a wide-swinging name, the examples stacked an out-of-the-money call calendar with an out-of-the-money put calendar so a daily directional forecast was not required. That stack is a dual-wing-calendar.

The illustrated CIEN stack bought the October 80 call and sold the July 80 call for 3.30 and bought the October 50 put and sold the July 50 put for 2.20, a 5.50 combined debit ascribed to the October-July implied-volatility skew.

At the illustrated July expiry that dual-wing-calendar was plotted as positive between 44 and 113, peaked at 80, and carried a stated 550 maximum loss equal to the opening debit.

Wing-repair after a spike or drop

A later spike or drop was handled by a wing-repair: buying back the opposite short option so the remaining long option could participate through that wing if price continued through that side.