A calendar spread uses options at the same strike but different expirations. It profits from time decay and volatility changes. Here is how calendar spreads work.
What is a Calendar Spread?
A calendar spread (also called a time spread or horizontal spread) involves selling a near-term option and buying a longer-term option at the same strike price. Both options are the same type (both calls or both puts).
Simple version: You sell an option that expires soon and buy one that expires later. The short-term option decays faster, so you profit from the difference in time decay.
How Calendar Spreads Work
- Sell: Near-term option (decays faster)
- Buy: Longer-term option (decays slower)
- Result: Net debit to open the position
- Profit: From difference in theta decay and IV changes
Calendar Spread Example
Stock is at $100 in early January.
- Sell February $100 call for $3.00
- Buy March $100 call for $4.50
- Net debit: $1.50 ($150 per contract)
If stock stays near $100 until February expiration, the short call expires worthless and you still own the March call.
Ideal outcome: Stock pins at $100 at February expiration.
When to Use Calendar Spreads
- Neutral outlook: You expect the stock to stay near a specific price
- Low IV environment: You expect volatility to increase
- Earnings play: Position before earnings, sell the front-month before the event
- Reduce cost basis: Lower cost of owning longer-term options
Calendar Spread vs Vertical Spread
- Calendar spread: Same strike, different expirations. Profits from time decay.
- Vertical spread: Different strikes, same expiration. Profits from direction.
Risks of Calendar Spreads
- Movement risk: If stock moves too far from the strike, both options lose value
- IV drop: A decrease in implied volatility hurts the long option more
- Early assignment: The short option can be assigned early
- Complexity: Managing two different expirations requires attention
Managing Calendar Spreads
- Close when you have captured 25-50% of max potential profit
- Close if stock moves significantly away from your strike
- Roll the short option to a later date to collect more premium
- Consider closing before the short option expiration to avoid pin risk
Diagonal Spreads
A diagonal spread is a variation where the strikes are also different. You combine calendar and vertical spread characteristics.
- More directional than a pure calendar
- Can be adjusted for bullish or bearish bias
- Offers more flexibility in strike selection
Track Your Calendar Spreads
Pro Trader Dashboard tracks multi-leg positions across different expirations.
Summary
Calendar spreads profit from the difference in time decay between near-term and longer-term options. They work best when you expect the stock to stay near a specific price and when you expect volatility to rise. The strategy requires active management and understanding of both time decay and volatility dynamics.
Learn more: theta decay and vertical spreads.