Calendar Spread
Quick Definition
An options strategy that involves buying and selling options at the same strike price but with different expiration dates, profiting from time decay differences.
What Is Calendar Spread?
A calendar spread (also called a time spread or horizontal spread) involves buying a longer-dated option and selling a shorter-dated option at the same strike price. The strategy profits from the faster time decay (theta) of the near-term option relative to the longer-term option. Maximum profit occurs when the underlying is at or near the strike price at the near-term expiration. Calendar spreads benefit from stable or rising implied volatility and are hurt by declining volatility. They are commonly used as income strategies or to position for an expected volatility event (like earnings) by selling options expiring before the event and buying options expiring after it. The strategy has limited risk (the net debit paid) but also limited profit potential.
Calendar Spread Example
- 1Sell the 30-day $100 call for $3 and buy the 60-day $100 call for $5, paying $2 net. If the stock stays near $100, the short call decays faster, generating profit
- 2Before earnings in 3 weeks, sell the 2-week $150 call and buy the 4-week $150 call — the near-term option decays pre-earnings while the long option retains value
Related Terms
Diagonal Spread
An options strategy combining different strike prices AND different expiration dates, blending elements of both vertical and calendar spreads.
Theta (Options)
The Greek that measures the rate at which an option loses value as time passes, also known as time decay.
Time Decay
The reduction in an option's value as it approaches its expiration date, reflecting the decreasing probability of a profitable move.
Implied Volatility (IV)
The market's forecast of the likely magnitude of future price movements, derived from current option prices using pricing models.
Options Premium
The price paid by the option buyer to the seller for the rights conveyed by the contract, determined by intrinsic value, time value, and volatility.
Call Option
A contract giving the holder the right, but not the obligation, to buy an underlying asset at a specified price within a specified time period.
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