A calendar spread is the buying and selling of the same strike simultaneously in two different expiration months. To summarize, this strategy requires a stock to either remain or stay out of a certain range.
The strategies can be broken down as a debit spread or a credit spread. When you buy (debit) a calendar, you are anticipating that a stock price will remain between two certain prices. Whey you sell (credit) a calendar, you are anticipating that a stock will NOT remain between two certain prices. In general, the more time you give this strategy, the wider the range will be. Lets take a look at some examples.
The Debit Calendar Spread
You determined that a stock is going to remain in a range. A debit call calendar or put calendar is buying a longer term strike month strike and selling a shorter term strike month strike. Ex. Google continues to trade in between 540-560. The range is defined so you decide to buy a Jul5 550/ Aug1 550. The July strike is the shorter term month and the Aug is the longer term month. You are anticipating that the stock will continue to trade in between a range.
The Credit Calendar Spread
You determined that a stock is NOT going to remain in a range. A credit call calendar or put calendar is selling a longer term strike month strike and buying a shorter term strike month strike. Ex. Google continues to trade in between 540-560. The range is defined so you decide to sell a Jul5 520/ Aug1 520. The July strike is the shorter term month and the Aug is the longer term month. You are anticipating that the stock will NOT continue to trade in between a range. This strategy requires you to have margin so your broker will not allow you to perform this trade unless you have enough capital to cover the potential loss.