What is the primary assumption behind the simplified approach to calendar spreads?

The current futures price reflects all known market information. Calendar spreads are a high-risk, high-reward strategy. The near month contract is always cheaper than the current month contract. Calendar spreads require extensive fundamental analysis.

How are trading signals generated in the simplified calendar spread strategy?

By analyzing news and corporate actions related to the underlying stock. By calculating the fair value of both near month and current month contracts. By identifying discrepancies between the actual spread and its historical mean and standard deviation. By monitoring the open interest and volume of both contracts.

What is the recommended action when the spread between near month and current month contracts exceeds the upper range?

Buy the near month contract and sell the current month contract. Sell the near month contract and buy the current month contract. Hold both contracts until the spread narrows. Close all open positions to avoid further losses.

What is a key characteristic of calendar spread trades compared to pair trades?

Calendar spreads involve higher directional risk. Calendar spreads typically have longer holding periods. Calendar spreads require lower leverage due to higher risk. Calendar spreads can be ultra-short term in nature.

Why is it suggested to subtract the price of the near month contract from the current month contract when calculating the spread?

The near month contract is always more volatile. The current month contract has higher trading volume. The near month contract typically has a higher price due to the cost of carry. The current month contract is more sensitive to market news.