question on long calendar spreads calls

K

koolaid

I'm new to options and am still trying to understand the mechanics. I find options exciting but obviously it's no free lunch...seems like the hardest market to trade after forex. My question is regarding long calendar spreads...where you sell calls at strike A for the say MARCH and buy calls at strike A for APRIL. There's a debit to establish the position.

How do I exit? at the expiration of the front-end month...do I have to simulataneously close the back month too? What If I don't close the position by the front-end's expiration...they will expire...but I still had got credit for selling them earlier right? Thanx.
 
In general you want at least 2 rolls for your money...however if you do just a one month calendar you can allow the front month to expire OTM and hang on to the back month. There is an obvious risk to that. TOS has an excellent way to calculate all possible outcomes. Simply if you sell xyz for .50 cents in March and buy xyz for 1$ in April and it expires OTM in March you look at what April is worth. If it is too far OTM then April may only be worth .50cents and your basically out the comish costs if you close it. If March expires close to the money then you will be ahead and if the stock continues to go your way you could be way ahead. Your exit plan is important.

Its a fairly low risk trade that can be mangled easily on your exit.
Here is an old thread on calendar spreads that may help answer some questions.

http://elitetrader.com/vb/showthread.php?s=&threadid=58716&highlight=Calendar+spreads

I think CBOE has some video education on them as well
 
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