A reverse calendar spread involves the opposite positions: Buy short-term option, Sell longer-term option.
Expectations:
Anticipate a substantial move in the underlying asset’s price.
Expect a spike in implied volatility, boosting the value of the short-term option.
The near-term option must surge in value quickly. The anticipated move must be significant enough to surpass the slower decay of the longer-term option.
Assess the underlying asset’s short-term stability and long-term volatility. Keep an eye on implied volatility trends and be ready to adjust or exit positions based on market movements and volatility changes.
Calendar spreads offer a nuanced approach to options trading, leveraging time decay and volatility changes. While they require precise timing and market analysis, they provide a lower-cost, limited-risk strategy for profiting from stable short-term and volatile long-term market conditions. For further detailed strategies and examples, refer to sources like Hull’s “Options, Futures, and Other Derivatives” and McMillan’s “Options as a Strategic Investment”.