Reverse Calendar Spread

What Is a Reverse Calendar Spread?

A reverse calendar spread is a type of unit trade that includes buying a short-term option and selling a long-term option on a similar underlying security with a similar strike price. It is something contrary to a conventional calendar spread. Reverse calendar spreads can likewise be known as reverse horizontal spreads or reverse time spreads.

Understanding Reverse Calendar Spreads

Reverse calendar spreads and calendar spreads are a type of horizontal spread. Generally, spreads might be either horizontal, vertical, or diagonal. Most spreads are likewise developed as a ratio spread with investments made in inconsistent extents or ratios. A spread with a bigger investment in long options will be known as a backspread while a spread with a bigger investment in short options is known as a frontspread.

A reverse calendar spread is most profitable when markets take a colossal action in one or the other course. It isn't commonly utilized by individual investors trading stock or index options in light of the margin requirements. It is more normal among institutional investors.

As a horizontal spread strategy, the reverse calendar spread must utilize options on a similar underlying asset with a similar strike price. In every single horizontal spread, the goal will be to benefit from price changes over the long run. In this way, horizontal spreads will utilize options with varying expirations.

A reverse calendar spread is known for taking a long position in the close term option and a short position in the longer-term option. This varies from the calendar spread which takes a short position in the close term option and a long position in the longer-term option.

Reverse calendar spreads can be developed with one or the other put or call options. Like their calendar spread partner, they must utilize it is possible that either in the two legs of the unit trade.

Utilizing either put or call options, the strategy will for the most part be developed as either a backspread or a frontspread. A backspread (long spread) will buy more than it sells and a frontspread (short spread) will sell more than it buys.

1. Reverse calendar call spread: This strategy will zero in on calls. As a reverse calendar spread it will buy calls in the close to term and sell calls in the longer term. It looks to benefit from falling prices.
2. Reverse calendar put spread: This strategy will zero in on puts. As a reverse calendar spread it will buy puts in the close to term and sell puts with a longer-term expiration. It looks to benefit from rising prices.

Reverse Calendar Spread Example

With Exxon Mobil (NYSE: XOM) stock trading at generally $73.00 toward the finish of May 2019:

• Buy the June '19 75 call for $0.97 ($970 for one contract)
• Sell the September '19 75 call for $2.22 ($2,220 for one contract)

Net credit $1.25 ($1,250 for one spread)

Since this is a credit spread, the maximum loss is the amount paid for the strategy. The option bought is nearer to expiration and consequently has a lower price than the option sold, yielding a net receipt of premium.

The ideal market move for profit would be a huge rise in the underlying asset price during the life of the close term option followed by a period of stability to a progressive decline during the life of the far-term option. Initially, the strategy is bullish yet after the shorter option lapses it turns into a neutral to bearish strategy.

Features

• A reverse calendar spread is an options strategy to buy a short-term option while all the while selling a longer-term option in the equivalent underlying with a similar strike price.
• A reverse calendar spread is most profitable when the underlying asset takes a critical action in one or the other bearing before the close month option lapses.
• A reverse calendar spread is basically a short position in a conventional calendar spread.