In this strategy workshop, Liz and Jenny explain the basics of a Calendar Spread. This spread consists of a short At The Money (ATM) option in the front expiration and a Long ATM option at the same strike in a later dated expiration. We typically look to sell the front option with 30 days to expiration (DTE) and buy the back month option with roughly 60 days to expiration.
We place Calendar Spreads in liquid stocks that have a low Implied Volatility Rank (IVR). An IVR under 50% is what we generally consider low, as we buy these spreads in hopes that volatility expands. Because this strategy has multiple expiration cycles and is dependent on volatility changes, a maximum profit cannot be calculated.
Profit is achieved when the price of the stock "pins" at our strike price while volatility in the underlying also expands, allowing us to sell the spread to close for a higher credit than the debit paid to open the trade.