A calendar spread requires the purchase and sale of two calls or two puts in the same stock with
A) The same expiration date but different exercise prices.
B) The same exercise price but different expiration dates.
C) Different exercise prices and different expiration dates.
D) The same exercise price and the same expiration month.
E) Traded in different markets.

Question

Quizplus · Accepted Answer

A calendar spread involves buying and selling options with different expiration dates. By purchasing an option with a longer expiration date and selling an option with a shorter expiration date, the trader is hoping for the underlying asset's price to move in the short term, while the purchased option will continue to gain value over a longer period. By selecting options with the same exercise price, the trader is placing a bet primarily on the passage of time, and a profit can be made when the value of the shorter-term option declines more quickly than the value of the longer-term option. Therefore, the correct answer is B, the same exercise price but different expiration dates.

A Calendar Spread Requires the Purchase and Sale of Two