I just came across a topic test answer which says in a calendar spread the expectation is that a price move is not imminent.
Whereas i did come across different types of calendar spreads with both, imminent and not imminent expectations.
What am i missing.
If the move is NOT imminent, you’re buying a calendar spread. E.g., selling a near term call option contract, and buying a further dated call contract with the same strike. The idea is you capture the extrinsic value that exists in the near dated contract (which you think will expire worthless as the move won’t take place till after that contract expires) and capture the upside in the long further dated call once the move takes place.
For a non-imminent calendar spread, one can sell a near dated call (i.e. sell April 2017 $20 call) and buy a long dated call (i.e. buy July 2017 $20 call). You don’t expect anything to happen in the next couple of month but you have a $25 price target in July. This is an example of a long calendar spread.
For an imminent calendar spread, one would buy the near dated call and sell the long dated call if you are assuming a price movement in the near future but expect it not to last in the future. This is an example of a short calendar spread.