Calendar Spread (Options)
Sell a near-dated option and buy a longer-dated option at the same strike. Profits from faster near-term theta decay and favorable IV term structure.
A calendar spread (also called a time spread or horizontal spread) involves selling a shorter-dated option and buying a longer-dated option at the same strike. Because the near-term option decays faster, the position profits from the difference in theta between the two legs.
The ideal scenario: the underlying stays near the strike as the front-month option decays rapidly, then the position is closed or rolled before the back-month's time value erodes. Rising implied volatility in the back month (with stable or falling front-month IV) also benefits the spread.
Calendar spreads are defined-risk trades with a modest debit cost — max loss is the net premium paid. They are popular in low-IV environments where buying longer-dated optionality is cheap.
Example
With AAPL at $200, sell the 30-day $200 call for $3.50 and buy the 60-day $200 call for $5.20, paying a $1.70 net debit. If AAPL pins near $200 over the next 30 days, the short call expires worthless and you own the 60-day call at a reduced cost basis.
Related Terms
At the Money (ATM)
An option whose strike price equals (or is very close to) the current spot price of the underlying.
IntermediateExpiration Date
The last date on which an option can be exercised; after this date the contract ceases to exist.
IntermediateImplied Volatility
The market's forward-looking expectation of volatility, derived by solving the options pricing model for the volatility that matches the observed premium.
AdvancedTheta
The daily rate of time value erosion in an option's price, assuming all else stays constant. Usually negative for long options.
IntermediateVertical Spread
An options strategy involving the simultaneous buy and sell of two options of the same type and expiration but at different strikes, limiting both risk and reward.
Intermediate