A calendar spread is an income trade that involves selling a short-term option and buying a longer-term option with the same strike price. In today's example, we'll look at a calendar spread trade for UPS stock. United Parcel Service is holding gains well after gapping up on earnings.
A calendar spread trade is usually done with monthly options, but it can also be done with weekly options.
Traders typically use call options unless the trade has a bearish bias, in which case they would use puts.
UPS Stock Option Trade
With UPS stock trading around 230, setting up a calendar spread at 230 gives the trade a neutral outlook.
Selling the March 18 put option with a strike price of 230 will generate around $750 in premium, and buying the April 14, 230 put will cost approximately $950.
That results in a net cost for the trade of $200 per spread, and that is the most the trade can lose.
The estimated maximum profit is $450, but that could vary depending on changes in implied volatility.
The idea with the trade is that if UPS stock remains around 230 for the next few weeks, the sold option will decay faster than the bought option allowing the trade to be closed for a profit.
The break-even prices for the trade are estimated at around 218 and 243. But these can also change slightly depending on changes in implied volatility.
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For this reason, calendar spreads are considered a more advanced strategy and not recommended for beginners.
Profit Target
For a trade like this, I would set a profit target of 30%. I would also set a stop loss if UPS stock breaks through either 218 or 243.
Calendar spreads are a neutral option trading strategy. Bullish traders might consider something simpler like a long call, similar to this trade in Williams Companies stock or this cash secured put on Haliburton stock.
UPS stock is ranked number 1 in its group and has a Composite Rating of 96, an EPS Rating of 89 and a Relative Strength Rating of 93.
With Meta Platforms stock doing a cliff dive after earnings, this bearish calendar spread looks like it will work out quite well.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
