Hello, my dear friend. I hope you are doing well. Through this blog, I try to share few options strategies so that we all together can learn and execute these strategies.
Today I’m sharing a calendar spread options strategy in Nifty for the next 2 trading days. It’s a neutral strategy and I have created it based on the OI data.
Before I shared the strategy, let me tell you what is a calendar spread options strategy and when we need to deploy it.
What exactly is the calendar spread options strategy?
A calendar spread options strategy is a sort of options trading technique in which options with different expiration dates are bought and sold. A horizontal spread, time spread, or horizontal call spread is another name for this method. An investor employs this approach by purchasing a longer-term option with a later expiration date and selling a shorter-term option with an earlier expiration date.
Assume an options trader purchases a call option on a stock with a strike price of ₹100 that expires in 2 months. Simultaneously, the options trader sells a call option on the same stock with a ₹100 strike price that expires in one month. This results in the creation of a calendar spread option strategy.
The Calendar Spread Options Strategy: How and When Does It Work?
The longer-term option and the shorter-term option have different rates of temporal decay, which the calendar spread options strategy exploits. Time decay is the term for the value loss that occurs as an option contract gets closer to its expiration date.
The longer-term option in a calendar spread options strategy has a higher temporal value than the shorter-term option. The time value of the shorter-term option declines more quickly than the longer-term option as the latter approaches its expiration date. Due to the different rates of time decay between the two options, this presents a potential for the investor to make money.
Although the calendar spread options strategy can be used in any market environment, low-volatility markets are when it shines the brightest. Because option premiums are often lower in these markets, it is more challenging to make money using conventional options trading tactics.
Even when the price of the underlying stock is generally consistent, options traders can profit from the difference in time decay between the two options using the calendar spread options strategy.
When an options trader has a neutral view in short term, can use this calendar spread options strategy. Where he/she can minimize the risk due to any directional movement that can trigger high loss if holding a naked trade.
I hope now you have understood what is a calendar spread options strategy. Now let’s move to our nifty strategy, that I have created for the next 2 days.
Calendar Spread Options Strategy in Nifty
Before I share the strategy, few more things I want to share about this strategy. Why I have chosen this calendar spread options strategy in nifty and how I choose the range. To know that let me share the chart of Nifty first.
You can see after a breakout from 20000, Nifty is trading in a range from last 2 sessions. This is the ideal situation for any no-directional options strategy where there is no clear indication of direction.
Nifty is facing resistance around 20300 and OI data also suggest that 20100 - 20300 is the range for the current expiry. I used the same range to deploy this calendar spread options strategy in Nifty.
Calendar Spread Options Strategy in Nifty
Because the risk is high so you need to monitor it very closely. You can keep a stop loss around breakevens i.e. 20350 & 20050. This means if you find that nifty is sustaining beyond these breakevens, you can just square off these strategies.
We will do certain adjustments like reverse buying to reduce the risk, which we will share in our premium channel.
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I hope these strategies are helping to generate some cash flow from options strategies. If you have any query related to this calendar spread options strategy in nifty, please type in the comment box.
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DISCLAIMER: – we are not SEBI research analysts. Views and strategies are posted here only for educational purposes. There is no liability whatsoever for any loss arising from the use of this product or its contents. This product is not a recommendation to buy or sell, but rather a guideline for interpreting specified analysis methods. This information should only be used by investors and traders who are aware of the risk inherent in securities trading.