High Probability Option Trading: 

Calendar Spreads

Steve Lentz

Director of Education and Research

OptionVue Research, Inc.

Disclaimer

Option trading can involve highly volatile returns and 

unlimited risk.  Option trading is not suitable for every 

investor.

Overview  

Introduction to Options and Graphical Analysis

Why Trade Option Spreads

The Role of Volatility

Advantages of Selling Premium

Calendar Spreads

Obtaining Candidate Stocks

Introduction to Options 

and Graphical Analysis

Call Option – Right but not obligation to buy stock 

at a certain price on a certain date

Put Option – Right but not obligation to sell stock 

at a certain price on a certain date

Bid             Ask           MIV             Trade             Bid             Ask           MIV            Trade

Last           Change                         Trade

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Calendar Spread

Last           Change                         Trade

Bid             Ask           MIV             Trade             Bid             Ask           MIV            Trade

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IGEN

Calendar Spread

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Last           Change                         Trade

Bid             Ask           MIV             Trade             Bid             Ask           MIV            Trade

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Calendar Spread

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Today’s Risk/Reward Line

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Risk/Reward Line for 16 Days Away

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1

st

Standard Deviation of

Possible Price Outcomes
Based on Last Month of Trading

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Risk/Reward Line for Expiration in

32 Days

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Why Trade Option Spreads ?

To Obtain Favorable Risk/Reward Ratios

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Long 100 Shares of Stock

Long 1 Call Option
16 Days Out

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Long Stock

1:1 Risk/Reward Ratio

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Long Option

Negative Risk/Reward Ratio

On Normal Sized Moves

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Long Option

Positive Risk/Reward Ratio

Only on Big Moves

Option Spreads

Help Create Positive Risk/Reward Ratios

On Normal Sized Moves

IGEN

Option Spreads

Positive Risk/Reward Ratio

Only on Normal Moves

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Advantages of Selling Premium:

Adopt the role of insurance company

Time is on your side

Through risk management, the long-term 

odds can be in your favor

The Role of Volatility

SV

IV

IMPLIED VOLATILITY (IV)

Measures the volatility of the underlying asset 
implied by current option prices

Higher IV Means More Time Premium to Sell

STATISTICAL VOLATILITY (SV)

Measures how much the price of the asset itself has 
bounced around recently

Higher SV Means a Wider Standard Deviation of 

Possible Price Outcomes

Percentile Rankings

Knowing a 

Good Premium Selling Situation

Expensive vs. Inexpensive

Overvalued vs. Undervalued

Expensive = High IV Percentile

Inexpensive = Low IV Percentile

IV Percentile Rankings

0

30%

70%

100%

INEXPENSIVE

EXPENSIVE

Overvalued = High IV/SV Ratio

Undervalued = Low IV/SV Ratio

Knowing a 

Good Premium Selling Situation

Sell Expensive and Overvalued Options

Purchase Inexpensive and Undervalued 

Options

Calendar Spreads for the

Option Trader

Bid             Ask           MIV             Trade             Bid             Ask           MIV            Trade

Last           Change                         Trade

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IGEN

Calendar Spread

Last           Change                         Trade

Bid             Ask           T.Prem       Trade                Bid             Ask           T.Prem     Trade

IGEN

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Calendar Spread

Last           Change                         Trade

Bid             Ask           T.Prem       Trade                Bid             Ask           T.Prem     Trade

IGEN

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Calendar Spread

Theta:

Daily drop in dollar value of an option 

due to the effect of time alone. Theta is 

dollars lost per day per contract.

Last           Change                         Trade

Bid             Ask           Theta        Trade                Bid             Ask           Theta        Trade

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Calendar Spread

$5.26 - $2.17 = $3.09 Position Theta

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Today’s Risk/Reward Line

IGEN

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Risk/Reward Line for 16 Days Away

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Risk/Reward Line for Expiration in 32 Days

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87% Probability

50% Probability

Position Requirements

Last           Change                         Trade

Bid             Ask           MIV             Trade             Bid             Ask           MIV            Trade

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IGEN

Calendar Spread

Stock Position:

100 shares 

X $79.33 =  $7,933

Margined Position:

$7,933 X 50% = $3,967

Last           Change                         Trade

Bid             Ask           Theta           Trade             Bid             Ask           Theta         Trade

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Calendar Spread

Calendar Spread:

Buy 1 June 40 Call at $4.50 = $450 Debit

Sell 1 May 40 Call at $2.45 = $245 Credit

Total Requirement  =  $205 Debit

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$205 Requirement

$3967 Requirement

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Calendar Spread

Variations

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Calendar Spread

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Calendar Spread

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Calendar Spread

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Volatility Profile for 

Good Calendar Spreads

#1…A Large 

Horizontal Volatility Skew

Bid             Ask           MIV             Trade             Bid             Ask           MIV            Trade

Last           Change                         Trade

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IGEN

Calendar Spread

#2…Overvalued

Option Chains

#2…Inexpensive

Option Chains

Obtaining Candidate Stocks

High Probability Option Trading: 

Calendar Spreads

Steve Lentz

Director of Education and Research

OptionVue Research, Inc.