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Short Calendar Spread
What: A Short, at-the-money Calendar Spread. This position is created by purchasing a nearer month call (or put) option and selling short a longer dated call (or put) option at the same strike as the nearer month. Both options must be either calls or puts and are for the same underlying asset.
When: The trade is ideally suited for swiftly rising markets, such as those typical of a technical bounce after a sharp sell-off.
Why: Because the trade makes money when volatility contracts and the underlying price moves away from the strike price of the trade. As markets rise swiftly, volatility tends to contract and the underlying is doing the right thing by moving away from the spread's strike price.
The trade might be deemed a good speculative position for someone trying to pinpoint the bottom. If they are right and the market bounces up, the odds of profits are good. If they are wrong and the underlying keeps descending, the trade will suffer because volatility will likely continue to increase; however, the increase in volatility will be offset to some degree by the underlying's movement away (to the downside) from the strike price.
Note: The margin requirement for this trade will be like that of a naked option as the short, back-month contract will be considered un-hedged.
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It is our pleasure to offer OLI readers this exclusive offer to save 59% on our educational video: "Investigating The Covered Call". When ordering, just type "OLI" in the "promotional code" field to get the entire video for just $20. 
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