A calendar spread is composed of two options of the same type (both calls or both puts) with the same exercise price, different expiration months and opposing positions. Calendar spreads are also called Time Spreads. The Optionetics Platinum web site strategy matrix currently uses the abbreviation "TSpread" when referring to calendar spread option combinations.

This discussion will show how to use the Optionetics Platinum tools to find and analyze a long ATM time spread that uses puts. ATM stands for At-The-Money and means that the option strike price is near the price of the stock when the option trade is purchased. We will be buying an ATM put that has a far month expiration and selling an ATM put that has a short month expiration. As time passes the short-month put will loose value faster than the long-term put. If the underlying stock stays near the option strike price, the short put will loose all value. The long put will still have time value left to go. If the near month put expires with the stock near the option strike price, we will get to keep the near month put credit and sell the far month put, capturing its remaining time value.

One objective in buying the calendar spread is to have the short, near month option have higher implied volatility than the long, far month option. This means we receive a substantial credit to sell the near month put (we want near month implied volatility to be high ) and do not have to pay extra to buy the far month put ( far month implied volatility is lower). The net cost to buy the calendar spread will be low.

It is interesting to see what happens in calendar spreads as the stock moves away from the ATM strike price. The time spread difference between the two options begins to collapse. As the stock decreases in price, the loss in value in the short put is offset by the increase in value of the long put. If the stock decreases far enough the trade becomes unprofitable, but the loss is limited. If the short put is assigned, you sell the far month long put to partially offset the loss incurred by the assignment.

As the stock price increases, the loss in value of the long put is offset by the increased likelihood that you will keep the short put credit. The maximum upside loss is limited to the cost of the spread. In addition, you do not have to make any more trades to close out your positions and you save on commissions. Since you will not be assigned, you can wait for the possibility that the stock may eventually return to below the original strike price. The long put still has profit potential after the short put expires.

A long ATM calendar spread can also increase in value if implied volatility increases. If implied volatility increases, both options increase in value, but the far month put will gain more value. The profit region will grow. The stock will often move away from the strike price that would normally cause the ATM long calendar spread to loose money. This movement can also cause implied volatility to increase. The calendar spread may not only hold value, but it can even increase in value as future uncertainty grows.

These are then are the characteristics we are looking for in a long ATM calendar spread.

1. High near month implied volatility and lower far month implied volatility. (Low cost to buy the spread).
2. Near term low statistical volatility (also called historical volatility) but with higher longer term statistical volatility. (Characteristics of a volatile stock that may have settled down recently)
3. A stock with a recent trading range around the chosen ATM strike. (We want to avoid a trending stock)
4. A stock with a lower price that may be consolidating. (Avoid assignment on the short side).

• Select 4-17-00 in the date selector lists.
• Click All Dates if this date is not shown.
• This causes the Welcome page to reload with all online dates selectable (2 years worth).
• Select 4-17-00 and click Create A Rank Lists.

Create A Rank List is a tool to narrow our search for calendar spreads to a list of stocks that have our desired characteristics. The purpose of the tool is to create a stock list that we can input into another Optionsanalysis tool: Create A Search. We do this, because Create A Search is limited to 2000 trade searches. Only a few stocks (200 or less) in the Create A Search input list can max out the trade search limit. Create A Rank List, on the other hand, has no search limit.

Create A Rank List can be used unwisely. Poorly chosen rankings can take a long time (> 2 minutes) and overload the server frustrating all online users. The steps shown below allow a user to rank all the online stocks for desired characteristics, and perform these rankings using reasonable server resources.

First, use the Explosive or Quiet buttons to narrow the entire online stock list down to a manageable set. Explosive and Quiet are the two fastest responding rankers in the Create A Rank List web page. We will narrow the stock list by deciding on the stock price trading range we want to investigate. At the bottom right of the web page is the maximum and minimum price filters. We want low priced, but tradable stocks, so we set the min to 20 and the max to 80.

If you are creating a stock list where statistical volatility is not a concern, the next thing you would do is:

• Select "unity" and "unity" for the SV/SV selections to the left of the Explosive button.
• Click Explosive.

However, in the calendar spread case we choose the 10 day SV / 90 day SV ranker. The min and max prices of 20 and 80 are also selected. We will click the Quiet button option. We want high volatility stocks that have recently settled down. We must make other choices before clicking the Quiet button.

• The input list at the top of the page is selected to be All Stock Options.
• The output list is selected to be Rank List 1.
• We see that the Quiet button uses the B option for selecting the number of stocks to save in the output list.
• Select 500 stocks next to the blue B.
• The other options below the table are good at their default values.
• Click the Quiet button.
• A ranked list should start loading in less than 5 sec.
• Only the top 200 are actually displayed.

• Click the browser back button to return to the ranker.
• Choose Rank List 1 (which we just created) as input.
• Choose Rank List 2 as output.
• We are going to use the Percentile Implied Volatility ranker.

Click the expensive button for Percentile IVs. This button can take a long time to create a ranking. The expensive button for Percentile IVs with a 500 stock input list and low server usage takes less than one minute to complete. The amount of time needed by the percentile IV ranker increases dramatically when the input stock list has more than 500 stocks.

After clicking the button, the Percentile IV ranking appears and the top category has been saved in Rank List 2. The first 10 stocks in this ranking appear below:

April 17, 2000 was a very volatile day. Over 100 stocks from our original 500 are in the top 20 category. The ranking again resorts to a volume ranking when stocks have the same category. Hence, the above top 10 stocks all tend to be well known companies.

• Click the Welcome Page link at the top of the ranking page.
• Check to see that the date on the Welcome Page is still 4-17-00.
• Click Create A Search.
• Choose Rank List 2 as the input list in the "Select for trades in" option in Create A Search.
• Checkbox "Buy ATM Put TSpread" in the center column of the strategy matrix.
• Uncheckbox the four temporal filters below the strategy matrix to turn them on.

We get to decide the minimum days to the near expiration month, the maximum days to the far expiration month and the minimum and maximum days between calendar legs. Our choices are 60, 180, 60 and 120. We will expect trades to be found with expirations and time spreads between July and November.

• Uncheckbox "Near month IV must be 10% higher than far month IV" further down the page below Implied Volatility Filters.
• Change the default 25% number to 10%.

• Set both to strike variations to 0% under allowed strike variation.

Click the "Search 4-17-00 Now" button.

The top three results are shown below.