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Best Calendar Spread Setups to Profit From Volatility

When we believe the stock price will explode or crash soon, we can trade a Calendar Spread options strategy to maximise profits in times of high volatility. Though Calendar Spreads have huge leverage, it is a difficult trade to master as we need to be correct in both the direction and size of the trends to profit.

Today, we share a few different types of Calendar Spreads and how to find the best entry points.

What Is a Calendar Spread Options Strategy?

A Calendar Spread is a combination of long and short options at the same strike price but with different expiration dates. The trade uses the differences in theta to create a high-leverage trade. We can set up different types of Calendar Spreads based on different directional expectations, and profit from big volatility in the future.

If we believe ROKU will rise by $20 from the current market price of $72, we can trade a Calendar Spread at $90:

  • Buy a $90 Call option that expires in 2 months.
  • Sell a $90 Call option that expires next month.
roku bull calendar spread
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ROKU bullish Calendar Spread setup.

This Call Calendar Spread costs $249 in buying power.

TD Ameritrade can help us analyse the profitability of this Calendar Spread. If ROKU rises to $90 before the short Call expires next month, the Calendar Spread value will increase to $516, making a profit of 107%.

roku calendar spread profit analysis
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Maximum profit when ROKU rises to $90.

If we believe PYPL's stock price may fall from $97 to $75 very soon, we can trade a bearish Calendar Spread at $75:

  • Buy a $75 Put option that expires in 2 months.
  • Sell a $75 Put option that expires next month.
pypl bear calendar spread
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PYPL bearish Calendar Spread setup.

This Put Calendar Spread costs $113 in buying power.

The profit analysis from TD Ameritrade shows if PYPL falls to $75 before the short Put expires next month, the Calendar Spread options value will increase to $389, making a profit of 244%.

pypl calendar spread profit analysis
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Maximum profit when PYPL falls to $75.

Key Points to Trading Calendar Spreads

A Calendar Spread uses the different option expiration dates to create a difference in theta to increase our leverage.

Theta is the changes to options value with respect to changes in time.

By comparing different theta decays of 60 and 30 DTE options, the theta decay is slower the further away from expiration.

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The greater the theta decay the closer to expiration.

So the theta decay of the long option is slower than the short option in a Calendar Spread. The closer the stock price moves towards our strike price, the greater the difference between theta, leading to greater profits.

Vega is the changes to options value with respect to changes in IV.

A low IV leads to a lower options value, while a high IV leads to a higher options value. So we buy to open a Calendar Spread at low IV, then sell to close when the IV rises.

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How to Find Bullish Calendar Spread Entry Points?

The Bull Put Spread Screener uses fundamental analysis to find the Fair Values of stocks. It also uses technical analysis in Long Days to find the timing of bullish trends. We can sort the list by Upside to find heavily undervalued stocks with the greatest upward potential.

bullish calendar spread screener
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Use the Bull Put Spread Screener to find bullish stocks.

The BABA stock has the greatest Upside of 102%, and shows a bullish trend that began 14 trading days ago, indicated by the Long Days signal. So we can be confident of a bullish outlook for Alibaba.

We want to find a Calendar Spread strike price that BABA can reach, so we take a midpoint between the current price and the Fair Value to set as the strike price:

  • Buy a $135 Call that expires in 2 months.
  • Sell a $135 Call that expires next month.
baba bull calendar spread
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BABA bullish Calendar Spread setup.

This Calendar Spread costs $39 in buying power.

If BABA rises to $135 within a month, the option's value will rise to $830 for a profit of 2,028%.

baba calendar spread profit analysis
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Maximum profit when BABA rises to $135.

How to Find Bearish Calendar Spread Entry Points?

The Bear Call Spread Screener uses fundamental analysis to find the Fair Values of stocks. It also uses technical analysis in Short Days to find the timing of bearish trends. We can sort the list by Upside to find heavily overvalued stocks with the greatest downward potential.

bearish calendar spread screener
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Use the Bear Call Spread Screener to find bearish stocks.

The ENPH stock has the lowest Upside of -54%, and shows a bearish trend that began a trading day ago, indicated by the Short Days signal. So we can be confident of a bearish outlook for Enphase.

We want to find a Calendar Spread strike price that ENPH can realistically reach, so we take a midpoint between the current price and the Fair Value to set as the strike price:

  • Buy a $230 Put that expires in 2 months.
  • Sell a $230 Put that expires next month.
enph bear calendar spread
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ENPH bearish Calendar Spread setup.

This Calendar Spread costs $515 in buying power.

If ENPH drops to $230 within a month, the option's value will rise to $1511 for a profit of 193%.

enph calendar spread profit analysis
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Maximum profit when ENPH falls to $230.

Now you know how to use the bullish screener and bearish screener to find good Calendar Spread opportunities, and profit from big volatility.

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