After a wild spring, stocks might be settling into a trading range as the summer sets in.

But for options traders, summer doldrums can cost money as time decay saps premium from long put and call positions.

A great way to bridge the time gap is to embrace calendar spreads.

A calendar spread entails selling a near-term option to help finance the purchase of a later-dated option. The most basic construction entails doing both trades at the at-the-money strike price.

This creates a neutral position in which you want the underlying stock to remain unchanged.

Since near-term options lose value via time decay faster than longer-term ones, the position will generate a profit if the stock stays flat.

Once the near-term option expires, the longer-dated option can either be sold for a profit or simply held with a new, lower effective cost basis. The position can also be rolled by selling the next near-term option.

I want to look at some variations on the basic calendar spread (you can read more about them here ) that will give the position a directional bias and potentially bigger profits.

This can be done with variations in individual option contract strike price and expirations, or by creating a ratio between the number of contracts purchased and sold.  Which approach you take will depend on your specific outlook for the individual name.

Let’s look at two examples.  Note option values and potential profit and loss at the expirations have been calculated using the CBOE’s (NASDAQ:CBOE ) basic options calculator .

Apple (NASDAQ:AAPL ) has enjoyed a great move from the low $500s to around $600 following its earnings report, which also featured the announcement of a stock split and a bigger buyback program.

But more upside might be limited in the near term as investors await both the next earnings report and the release of a new iPhone or possibly entirely new product.

I want to set up a position that would benefit from a modest 3-4% gain over the next month, but more importantly, one that positions me for bigger gains in the fall.

I can do so with an out-of-the-money calendar spread.

Specifically:

-Sell 1 June $630 call at $4 a contract

-Buy 1 October $630 call at $20 a contract

This spread costs a $16 net debit ($20 — $4).

The position’s current delta is +0.18, meaning it is the equivalent of being long 18 shares.

More importantly, the theta is +0.07, which equates to collecting $7 a day in time decay. Theta will accelerate as the June options approach their expiration date.

If shares remain at $600 for the next 30 days, the position will collect the full $4 from the June options as they expire worthless, while the value of the long October calls will only decline by about $1.50 in time decay. That means a profit of $2.50.

That maximum loss is equal to the $16 cost. It would be incurred if Apple plummeted dramatically — as in below $300. It seems unlikely, but it’s a possibility I have to put out there.

Likewise, if shares surged above $700 in the next 30 days, both calls would be so deep in the money that they would basically be trading at intrinsic value. The spread would go to zero, and again, you would lose the $16 purchase price.

The more likely losing scenario would be that shares slip modestly, in which case the long October calls would still retain significant value.

The optimal scenario is shares move toward $630 at the June 20 expiration date.

In this case, the June options would expire worthless and the value of the October options would increase by about $8 to $28 per contract.  At this point one could simply close out the position by selling the October calls for a total $12 profit. That $12 would be comprised of the $4 collected from the short sales of the June calls and the $8 gain in the October calls.

Another option would be to further reduce the October cost basis by rollingthe calendar by selling July calls. In this case, given that the delta of the October calls is now 0.50, I would sell a higher strike, creating a diagonal calendar spread, maintaining more upside potential.

If the stock keeps marching steadily higher by the July expiration, you could then roll up and out again into August calls. And then again into September.  You get the idea.

Other names this approach might make sense for include Micron (NASDAQ:MU ), 3M (NYSE:MMM ), or any other name with a nice steady uptrend.

Shares of Twitter (NYSE:TWTR ) have been beaten down badly over the past several months. I see  two potential scenarios unfolding in the near future:

1. A second wave of selling driving shares back to the original $26 IPO price, or

2. A jump back toward the $40 pre-lockup level.

With the stock trading around $32, that’s about an $8 or 25% move.  This is much greater than the 12% move the options are currently pricing for the next 30 days.  So I would look to be long both volatility and gamma .

I could l accomplish this by purchasing a greater number of near-term calls and selling fewer later-dated calls.

Specifically:

-Buy 2 June $33 calls for $0.90 a contract

-Sell 1 July $34 call for $1.25 a contract

This is a $0.55 net debit for the 2×1 spread. In this case, we have a negative theta of -0.06, meaning we lose $6 per day in time decay. This is why the position needs a fairly sharp move in a relatively short time frame.

The current delta is +0.40, or the equivalent of long 40 shares. But note: Because of the lower strike and closer expiration of the long June calls, they carry a higher delta and gamma. Both will increase at a more rapid rate than the short July calls. This means the position gets longer as shares rise.

Assume the stock hits $40 by June 15. Both calls would be worth $7. But since it is long 2 June call and short 1 July call, the total value of the position would be worth $7. That delivers a $6.45 profit. ($7 — $0.55), which was the net debit paid at the position’s inception.

If shares tumble, the July calls will lose value and the June calls will become worthless, meaning a slight loss beyond the initial net debit.

The worst case scenario is Twitter moving sideways or marginally higher to the $33-$34 range.

In this case, the negative time decay would cause the June calls to decay toward zero. But the July calls would retain time and may even gain value on their delta.

The losses are limited, but could still be upwards of two times the initial cost if shares are right at $33 on the June expiration.

This type of ratio position is best used when anticipating a sharp short-term move. Some of the highfliers like Netflix (NASDAQ:NFLX ) and Amazon (NASDAQ:AMZN ) might be good candidates if one expects a sharp move higher. The put side can also be considered if a trader is forecasting a sharp drop.

But be wary of using this strategy to capture profit on an earnings move. The known event will cause the implied volatility of the near-term option to be pumped up, and the typical IV decline following earnings would negatively impact the position.

Twitter: @steve13smith

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