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Morphing Time Spreads Options Trading Strategy

Filed Under Advanced Options Trading 

Morphing Time Spreads
 
As you recall, a time spread-also known as a calendar spread-involves a front and an out month. One of the considerations that must be taken into account is what happens when the front month expires? If we were in a long time spread, our front month short call expires and we are left with a naked long call in the out month. If we were long a put time spread, we will also be long a put. What should we do?
 
We have a few things that we can do. We can leave it as it is. Maybe we think the stock is going to trade down and you might be long the naked put. The reverse might be in play for a long call time spread where the price may be moving up. Either way, you’re naked long this option from the previous month. We must either morph it, hold it or close it out.  
 
If we’re short the time spread, we’re going to have a naked short option remaining and we know that’s unacceptable. According to Ron Ianieri, co-founder of Options University, when we’re short a naked option in our short spread, either short a put or short a call, that position must be addressed on expiration day of that front option.
 
In the Options Mastery training course offered by the Options University, they use the following example. Let’s say we’ve got a long the May and short the June, a short time spread. On the day that this option expires you must do something to this position and we cannot let this position become naked into the next month. If we’re short a time spread, we must take care of that out month short option on expiration day of the front month.
 
If you were in a short time spread and are stuck in a naked short put position at the end of the front month expiration, and the stock suddenly plummets, you could be in real trouble. When stocks breakdown, they usually do it in a hurry and can shed points like a dog shaking off water. Before you know it, the stock can lose 50% of its value. If this happens and you have sold a put, you will be assigned and obligated to buy the stock at the strike price, which could be way above the current price. On the other hand, if you are long a time spread, you will be naked long and the worst that can happen is the loss of premium.
 
To find out all about stock options, contact the Options University at www.optionsuniverstiy.com

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