Hey! So I'm still relatively new to the options trading game. From my knowledge I know the following: 1) Buy Call or Puts for directional plays -limited risk, unlimited profits 2) Sell Call /Puts to collect premium -unlimited risk, limited profits. 3) Any combination of these over different durations with different strikes lead to different advantages and suitability for market conditions. Questions: The calendar spread, I understand that you sell a front month (current month) option and buy the same option with same strike in a further out month. Is the purpose of buying this option for limiting risk purposes? Do you sell an OTM option or an ATM, expecting to be assigned? Or are people doing this only to get the next month option at a discounted price and to make a profit on the latter month movement? For example, I sell an ATM 6.00 Feb 20 call for $1 (credit +100). Buy a 6.00 Mar call for $2. (debit -100 to place this trade). If the stock goes to 7.00 in the near term, before expiration, I assume you'll sell the Mar call and close out the whole position assuming it generated a profit? I guess what I'm asking is, are you supposed to let this run to expiration or are you expecting to close the position before expiration, hoping that the latter month option has profited in the directional play? Isn't it possible to still lose on the position even if the underlying moves in your favour? i.e you hold it to expiration get assigned, exercise your latter month option (assuming American) and then sell it to the person at a loss ? If it settles below, I assume that you close out the position for a loss? I don't see why an IC wouldn't just settle this problem. Its limited risk, limited profit and as long as you trade within your means, it is unlikely you'll get blown out of the water.
same as my other post.... You should learn about the relationship between puts and calls and the underlying. This way you might understand that by hedging the put or the call, you are in fact turning your risk profile into a call or a put. You are not eliminating the risk, you are merely changing your risk profile. This will then get you thinking about more than 1 scenario - if this occurs then what, then what, then what, then what? ..................... For the calendar spread you have a lot of questions, and ultimately as for why someone is doing something is speculative and open ended. ...but you are understanding what i suggest above with your thought process... "I guess what I'm asking is, are you supposed to let this run to expiration or are you expecting to close the position before expiration, hoping that the latter month option has profited in the directional play? A: who knows..... Isn't it possible to still lose on the position even if the underlying moves in your favour? i.e you hold it to expiration get assigned, exercise your latter month option (assuming American) and then sell it to the person at a loss ?" A: yes. In your example yes, you could be long March calls and short the underlying after Feb expires.....what have you then got?