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I have only recently started looking into options trading, so the question may come off as ignorant.

My thought was that for an underlying security that has no special event like earnings. Could we construct a pair of option trades to obtain roll yield on time value?

A simple case: In November, sell a call option expiring in December and buy another call option expiring in January next year, both at the same strike price. Would this allow me to extract the time value while hedging against price movement?

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2 Answers 2

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What you describe is called a calendar spread, however as the deltas of the two options will differ when they are not at the money, thus you are not really hedging against price movement.

Calendar spreads have been discussed extensively here and elsewhere

Why a calendar spread is a preferred strategy in a low volatility period

How to manage risk on a call calendar when underlying is falling

http://www.optionseducation.org/strategies_advanced_concepts/strategies/long_call_calendar_spread.html

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  • $\begingroup$ The delta would differ even if both options are at the money. You're not really answering the question here. $\endgroup$
    – SRKX
    Commented Nov 25, 2016 at 5:55
  • $\begingroup$ Sorry but an ATM (Forward ATM) option has a delta of 0.5, whatever its maturity. What the op is describing is a calendar spread : - Sell a near call, buy a far call, delta neutral $\endgroup$
    – Lliane
    Commented Nov 25, 2016 at 7:15
  • $\begingroup$ According to this post it only does at maturity, and in general it seems $\Delta$ would always depend on $\tau = T-t$. No? $\endgroup$
    – SRKX
    Commented Nov 25, 2016 at 7:40
  • $\begingroup$ Acutally, this answer explains the rationale behind it more clearly. It's just an approximation. I'm not saying it's necessarily a bad one, but it has to be said. $\endgroup$
    – SRKX
    Commented Nov 25, 2016 at 7:48
  • $\begingroup$ I agree this is approximation, for one month apart calls on a stock that doesn't pay dividends in a near-zero interest rate environment it should hold. It used it to contrast with a 110% call calendar that is definitively not delta neutral. $\endgroup$
    – Lliane
    Commented Nov 25, 2016 at 7:54
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This is an example of a Calendar Spread like the above comment mentioned. Calendar spreads are not profitable under all circumstances. Even when it is profitable it is hard to capture the profit as everyone else would try to do so and the profit opportunities evaporates before you and I can get in to a trade. For instance, as of this writing, the extrinsic value of a shorter term one month options are lower than one twelfth of the one year options. That way, you don't make money on the above trade(s). The only difference is if the implied volatility changes and gives a profit that way but don't always count on such changes which may not come.

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