‘Timely’ Options Strategy
An option income trade that we have recently been ‘testing’ in our weekly options trading lab with good success – is the weekly options calendar spread – or the ‘compressed’ calendar spread.
The calendar spread is an option income trading strategy where the trader sells a short term option and then purchases a longer dated directly behind it at the same strike price.
Before weekly options came to be, option traders would usually sell a monthly option (front month option that expired in roughly 30 days) and then buy an option at the same strike price behind it – one that expired say two months away – or even 3 or 4 months away.
The way this trade makes money is through the difference in time decay between the front month option and the longer dated option. Options lose value at an accelerated rate the closer they get to expiration – so in a calendar spread the option that is being sold – the front month option – loses value at a much faster rate than the longer dated option that is purchased behind it.
When this method is applied to weekly options – the returns can be extraordinary. When using these shorter term derivatives, the options that are being sold are experiencing their FASTEST rate of decay as they are in the last week of expiration.
In addition, using the these options instead of the monthly options for this options trading strategy, option traders can now put this trade on every single week – four times a month – or potentially 52 times a year – where before we could only place them once per month – or 12 times per year.
Lastly – calendar spreads perform best in lower volatility environments – where volatility rises. Right now, the VIX is at ridiculously low levels – and over the last month to two months we have been experiencing extraordinary results with a specific weekly options calendar spread strategy that you can see how to learn more about by joining our free options income trading newsletter / website through the link below.
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