A calendar spread is used for taking advantage of the difference in different delivery month prices as opposed to speculating on the future price. In other words, the difference in the two delivery month prices is the driver for profits as opposed to a rise or decline in price. Calendar spreads are also known as horizontal spreads.

With that said, it is first important to properly choose the profitable two delivery months for the spread. This is done with proper research or common sense.

When choosing the spread for short term interest rates, for instance, there are certain months that fare better. With this spread March delivery should be the short leg. The reason for this is simply the maturity of the short term interest rate products causes a temporary relative price weakness as the delivery date approaches, coinciding with the maturity date.

Finally, for options, it is also important to check the analytics; delta and theta, before making the spread. This is because certain options, even though in the right delivery date, will still not perform well if the wrong strike prices are chosen. Generally, the short leg should be out of the money.

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