calendar spread trading rule

• Always check the P/L graph before placing the trade. You can use your broker tools or some free software. I usually use the TOS software to generate the graph.
• Avoid trading through dividends date.
• Avoid trading through major news like earnings announcements. The only exception to that rule is when you want to take advantage of the inflated IV of the front month, but those are highly speculative trades which might have a significant loss if the stock has a large post-earnings move.
• The front month options should expire in 5-7 weeks - unless you use weeklys which is usually more aggressive trade due to the gamma risk mentioned above.
• Have an exit plan before you enter the trade. My profit target is typically 20-30% and my mental stop loss is around 15-20%.
• Trade stocks which are in a trading range.
• Most of the time calendar spreads work better when IV is low. Those are vega positive trades which means they benefit from increase in IV.
• Aim for a long option near the low of its IV range. This gives it room to rise.
• Avoid lower priced stocks - the trade will be too cheap and commissions consuming. As a rule of thumb, stocks under $50 usually are not suitable for calendar spreads. For example, if the trade costs $0.70, with $3 per spread round trip commissions the commissions will eat over 4% of the trade value, not including rolls. If the spread is $3, the commissions will be just 1%. Over time, it will make a huge difference.