What is the finance, what is the calendar?
The distribution of a calendar or the spread of time is a shop with options in which the trader buys one option, then sells another with the same background market and strike price, but with another month of expiry. Time value of option - a post that expires the amount of time before expiry to the total price of the option_ - decomposes faster, the closer to the expiry of this option. Different rates of time decay for two calendar options will cause the difference between their prices to increase, creating a profit for a merchant. To work, the price of the substrate must remain relatively stable throughout the trade. Both transactions appear at the same strike. Based on the time value of the time value, the price price of the remote month will be higher than the price for the possibility of a close month and the trade is a debit transaction or loss for the merchant. These entry costs are equal to the difference between two option prices.
As the time proceeds, and if the basic market price remains stable, the price of the sold option will decrease faster than the price of the purchased options and the difference between two prices will increase. The trader can then leave the trade, which is a credit transaction at a higher total price than the cost of entry. This results in a net profit for the merchant.
You want to illustrate it, consider the hypothetical span of the calendar. The trader wants to make a futures range for the X Commodity Commodity. It's September. The trader buys the possibility of 50 January - the possibility that expires in January, with a strike price of $ 50 (USD) - for $ 8 and sells the possibility of 50 November for $ 5. The total cost of this transaction will be a $ 3 Debit.
When it arrives at the beginning of November, its price on November 50 disintegrated into $ 2 and its price from 50 January fell apart into $ 7. He now sells his 50 January for $ 7 and buys back his 50 November for 2 USD, resulting in credit $ 5. Its total profit for the store is credit, $ 5, minus the initial debit,$ 3, which is $ 2.
Another similar type of trade, albeit much less often used, is the range of backward calendar. Here the trader sells the possibility of Daler about the month and buys almost a month. Entering the store is clean credit and ends with profit only if the difference between option prices is reduced. The two most common ways to happen is if the price moves away from the strike or the overall expected volatility of the market when the store is turned on.