Timing Spreads

Options uniquely enable a trader to enhance trading returns by way of combining Buy/Sell legs in order to generate income on a regular basis.

Timing Spreads are characterized typically as a short-term option strategy where option premium is sold to take advantage of the time decay of an option. A trader can generate significant percentage returns with this option strategy even if the underlying stock hasn't moved at all. 

Time Spreads

Description (Source: Investopedia)

An options strategy involving the simultaneous purchase and sale of two options of the same type, having the same strike price, but different expiration dates.

Time Spreads are also known as calendar spread or horizontal spread. 

Construction – Long one call in a further out month while simultaneously short one call with the same strike but in a closer expiration month.

Function – To collect time premium by taking advantage of options non-linear rate of decay.

Bias – Neutral.

When to use – Best used during stagnant periods in order to collect premiums due to time decay. Unlike other premium collection strategies, the time spread offers a limited loss scenario in both directions.

Profit Scenario – If the stock remains stagnant, the position will profit by the nearer month option (which you are short) decaying at a faster rate than the further out month option (which you are long). When this occurs, the spread will widen thus creating a profit. Profit can also be attained if implied volatility increases.

Loss Scenario – If the stock moves away from the strike by either rising or falling, the spread will tighten, thus losing value and creating a loss.

Key Concepts – Time spreads are best done in at-the-money options where the extrinsic value is the highest which accentuates the rate of decay. Best results are found in stocks that are in a stagnant period as stock movement away from the strike will lead to losses.

Time Spread Example: (Investopedia.com)

An example of this would be the purchase of a Dec 20 call and the sale of a June 20 call. This strategy is used to profit from a change in the price difference as the securities move closer to maturity.