Options Outlook: Calendar Spread Screener Findings for January 6

Understanding Calendar Spreads in Options Trading

Calendar spreads are a flexible options trading approach that enables investors to take advantage of both time decay and fluctuations in implied volatility.

This method consists of selling a near-term option and, at the same time, purchasing a longer-term option with the same strike price. The resulting position is designed to profit from the passage of time and possible changes in volatility.

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Traders often turn to calendar spreads when they expect the underlying stock to remain relatively stable in the short run, but foresee increased volatility or a directional move in the future.

These spreads can be constructed using either calls or puts, making them suitable for both optimistic and pessimistic market views.

Exploring Barchart’s Long Call Calendar Screener

For January 6th, the Long Call Calendar Screener from Barchart was filtered to include only stocks with a market capitalization above $40 billion and total call volume exceeding 2,000, effectively excluding smaller companies.

The screener highlights notable calendar spread opportunities in well-known stocks such as DAL, NFLX, MS, WFC, and BAC. Let’s review a few specific cases.

Delta Airlines: Calendar Spread Example

Consider the first example from the screener. With Delta Airlines trading at $71.82, establishing a calendar spread at the $70 strike provides a neutral to slightly bearish stance.

This trade involves selling the January 16 call at the $70 strike and buying the March 20 call at the same strike, resulting in a net outlay of approximately $2.55 per spread—this amount also represents the maximum possible loss.

The projected maximum gain is $230, though this figure may shift with changes in implied volatility.

The strategy aims to benefit if Delta’s share price hovers near $70 in the coming days, as the short-term option will lose value faster than the long-term option, potentially allowing for a profitable exit.

Estimated breakeven points are around $64.75 and $76.75, but these can fluctuate with volatility.

If Delta’s price moves beyond $65 or $77, it would be prudent to consider adjusting or closing the position.

Netflix: Calendar Spread Example

For Netflix, with shares at $91.46, a trader could sell the January 23 call at the $95 strike and buy the March 20 call at the same strike.

This setup requires an investment of $227 per spread, which is also the maximum risk.

The estimated top profit is $360, subject to changes in implied volatility.

Breakeven prices are projected at about $86.50 and $107, but these may also vary with market conditions.

Wells Fargo: Calendar Spread Example

Lastly, let’s examine Wells Fargo. With the stock at $96.36, one could sell the January 16 call at the $95 strike and purchase the February 20 call at the same strike.

This trade costs $135 per spread, representing the maximum potential loss.

The estimated maximum return is $200, though this can change with volatility.

Breakeven levels are around $90 and $101, but these are also subject to adjustment based on implied volatility.

Managing Risk in Calendar Spreads

Calendar spreads come with defined risk, making them inherently manageable. Proper position sizing is essential to limit potential losses.

One risk management technique is to close the position if losses reach 20-30% of the premium paid.

Be aware that early assignment risk exists, especially if the stock price surpasses the short strike as expiration approaches.

Options trading carries significant risk, and it is possible to lose the entire investment.