Weekly Options – Compressed Calendar Spread

Weekly Options – New Variation

A new variation on an older option income strategy that is available to option traders is what I’l call the ‘compressed calendar’.

Traditionally, the calendar spread is a trade where the option trader purchases a further out option – or an option that has several months of life still in it until expiration – and then sells options at the same strike – with shorter time left in until expiration.

Weekly Options – Example

Here is an example of a traditional calendar spread…

Buy the Oct 55 call
Sell the June 55 call

The way this trade makes money is from the fact that the shorter term option – the one that is being sold – will lose value at a faster rate than the longer term one that is being purchased. Over time, this difference in the rate of change in the value of the two options can create a nice profit spread that can be realized by removing the entire calendar spread after some time has passed and a profit has been realized.

Of course, this position can lose money – and a couple things that can contribute to a loss is if the underlying being used moves too far in either direction from the strike where the options have been bought and sold. In order to realize the most profit in these types of positions, we need an underlying that is pretty much range bound, not moving around a lot, and for the most part stays in the same general vicinity of the strikes being utilized in the calendar spread.

Weekly Options – New Varation On Old Trade

Well, with the invention of weekly options, option traders can now create calendar spreads at a much faster pace if you will, or place these trades many more times per year than they could before weeklys were introduced.

For example, since with weekly options there are new options every single week, instead of creating a calendar spread where you purchase the Oct 55 call like in the example above – and then sell the June 55 call – you can instead purchase the Oct 55 call – but sell June 55 Week 1 options – and then when those expire you can sell June 55 week 2 options, and then week 3 options, and so on and so forth.

Some benefits of this is that the premiums one can generate using the weekys generate more profit over a month time period than selling just the 30 day option.

Another benefit is that since we are now selling options with only one week of life in them, we have less time / price risk than we do when using the 30 day options as our shorts.

And there are a ton of other benefits to be found in trading the weekly options that can help us option traders create an environment where the odds truly are stacked in our favor.  We’ll continue to put them here on our blog – and for a short cut join out free option income trading and weekly options newsletter / members site by clicking here

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