Later today, we will execute our first Time Spread. If you are not set up to trade spreads then you will need to sit this trade out. (However, I recommend that you study this trade as it’s a great trading strategy.)
The typical way to execute a time spread is by selling a near-term option and buying a longer-term option. The theory behind this trade is that the near-term option will decay at a greater rate than the longer-term option.
So lets assume fictional stock XYZ is trading at 23. If we simultaneously sell the December 25 Call and buy the January 25 Call, we will pay for this spread. For this exercise, we will theoretically pay $0.50. With my direction, the most we could possibly lose on this trade is $0.50.
Our hope with this fictional trade would be that the December 25 Call expires worthless and we’re left with our January 25 Call, which appreciates in value.