Calendar Spread

For ATM calendars, both are theoretically equivalent due to put-call parity. In practice: Use calls if you have a slight bullish bias or if calls are more liquid. Use puts if you have a slight bearish bias. Check which has tighter bid-ask spreads in your market. For most Singapore index options, liquidity is similar.

At front month expiration: If price is at the strike, front month expires worthless and you own the back month call/put - this is ideal. If price is away from strike, both options may have similar intrinsic values, resulting in max loss. Most traders close before expiration to avoid pin risk and gamma issues.

Calendar spreads are designed for range-bound markets. When price moves far from the strike, both options become similarly priced (both worthless if far OTM, or both intrinsic if far ITM). The time value differential that creates your profit disappears. This is why calendars have limited profit zones.

You need enough to pay the net debit. For STI options, a typical ATM calendar might cost S$50-150 per spread. Unlike short option strategies, there's no margin requirement beyond the debit because your risk is defined. Start with small positions (1-2 spreads) to learn the mechanics.

Calendar spread: Same strike, different expirations. Profits from time decay differential. Vertical spread: Same expiration, different strikes. Profits from directional movement. Calendars are neutral; verticals are directional.

Roll when: Price is still at/near strike, thesis unchanged, and rolling provides credit or minimal cost. Close when: Price has moved significantly, thesis changed, or IV environment unfavorable. Key question: Would you enter this calendar fresh at these prices? If yes, roll. If no, close.

Earnings create IV expansion before and crush after. If front month includes earnings but back month doesn't, front month has inflated IV (bad for you). If back month includes earnings but front doesn't, back month IV is elevated (good for you). Ideally, either both months include earnings or neither does. Or structure specifically for the event.

A diagonal spread is a calendar with different strikes - sell a front month option at one strike, buy a back month at a different strike. Example: Sell Sept 3200 call, buy Oct 3300 call (call diagonal). Diagonals add directional bias to the time spread concept. More complex but allows for price movement thesis.

Consider closing at 25-50% of max profit to lock in gains. While more profit is possible, theta is your friend but gamma and large moves are your enemy. The extra 3 weeks gives time for adverse moves. If you're at 30-40% profit, that's a solid return on a calendar - consider banking it.

Calendar breakevens are not fixed - they depend on the back month's value at front month expiration, which depends on IV. Approximately: Breakevens are at the points where back month value equals your debit. Use options calculator or broker's analysis tools. Generally, expect breakevens to be 3-5% above and below the strike for typical ATM calendars.

Analyze: (1) Term structure slope - steeper contango favors calendars, (2) Skew - compare call vs put calendars based on skew, (3) Vol smile - ATM usually lowest IV, slight OTM may offer better entry, (4) Historical vs implied - if RV << IV, calendars benefit from the overpriced implied vol. Enter when multiple factors align favorably.

Reverse calendars (buy front, sell back) are used when: (1) Expecting large move before front expiration, (2) Expecting IV contraction (short vega helps), (3) Term structure is inverted and may normalize, (4) Pre-event when you expect move but not direction. Reverse calendars lose money from time decay, so the move or IV change must happen quickly.

Options: (1) Close position before gamma zone (7-10 DTE), (2) Delta hedge with underlying to neutralize directional risk, (3) Buy OTM options in front month to limit gamma exposure (creates butterfly-like structure), (4) Roll to new front month before gamma explodes. Most retail traders should simply close or roll rather than active delta hedging.

Research suggests 30-45 days between expirations provides good balance. Front month should have meaningful theta decay (20-45 DTE), back month should retain significant time value (45-90 DTE). Ratio of approximately 1:2 to 1:3 (front:back DTE) works well. Too close = not enough differential. Too far = too much vega risk on back month.

Term structure inversion hurts calendars - front month IV spikes above back month. Options: (1) Close immediately if loss is acceptable, (2) Convert to reverse calendar by flipping the position (costly), (3) Hold if you believe inversion is temporary and have time, (4) Add protective options to limit further loss. In crisis situations, calendars often suffer - consider closing and repositioning after vol normalizes.