Hmm.. no easy answer to this. Check this module on option strategies on Varsity.
A futures or options spread fixed after entering long and short positions at the same time for the same underlying asset but having separate delivery months is known as a calendar spread.
It can be referred to as a horizontal spread, time spread, Intra market spread, or an inner delivery spread, as well.
Strategy 1: Long Call
This strategy is a perfect blend of short-term bearish or neutral outlook and bullish long-term outlook.
One short call option and a second long call option with wide apart expiry dates. Two calls having different strikes as well as separate expiration would have a differing profit or loss profile.
You can opt for this strategy when you want to decrease the cost of buying a long-term call option.
For example: 10 calls for Microsoft are bought at ₹800 on January 5, 2016. The strike price is ₹50 which expires in July 2016.
You write the 10 calls at the strike price of ₹53.50 expiring in July 2016. You received ₹250 for it!
In case the price of the stock stays below ₹50 at expiration, both the calls are deemed worthless and written off as loss minus the commission of ₹550 (₹800 - ₹250).
In case the value of the stocks shoots up to ₹53.50, you net a profit of ₹3,500 on the purchased 10 calls, and the written call is deemed worthless. ₹3,500 + ₹250 - ₹800 = ₹2,950, in net profit.
And if the prices of Microsoft stock rises even further beyond ₹53.50, you can exercise long call against the short call!
The profit would be ₹3,500 + short call premium - (long call premium + commission).
Strategy 2: Long Put
This is a strategy where the short-term bullish outlook is combined with a long-term bearish outlook.
To initiate long put, sell one short-term put option while purchasing a second long-term put option.
This strategy is beneficial when you are looking for either a stable or rising stock price in a short-term option, a declining price in a long-term option, or a steep incline in implicit volatility levels.
Strategy 3: Short Call
Selling a call in the calendar spread implies that you buy one call option and sell the long-term call option.
The profit is earned because of the mix characteristics of short and long-term call options.
In case the price of the stock remains unchanging, the strategy will face time decay!
An unbiased option strategy that combines the bear and the bull spreads is known as the butterfly spread.
To earn a profit, the strategy creates a scope of prices by employing four option contracts having same expiration but with three separate strike prices.
At the center strike price, the investor sells a couple of option contracts. He then buys one at a lower strike rate and the other one at a higher strike rate.
Strategy 1: Long Call
Combine a couple of short calls at the center strike, one long call at the upper strike and another at the lower strike.
Remember, all the options should have the same expiry, and both the lower and the upper strike has to be equidistant from the center strike.
Strategy 2: Long Put
A couple of short puts at the mid strike and one long put each at the lower and the upper strike.
Strategy 3: Short Call
Mid-strike comprises of a couple of long calls, whereas the upper and the lower strikes get a short call each.
Strategy 4: Short Put
A couple of puts are bought at the middle strike, while selling one each at the upper and the lower strike, respectively.
Calendars and butterflies are more suitable for sideways markets than for trending (bull or bear) markets. But you can do variations to these strategies (Ratio calendars and legging-in butterfly) to make it work in trending markets