What Is Calendar Spread?
A calendar spread (also called a time spread or horizontal spread) buys an option with a later expiration and sells one with a closer expiration, both at the same strike and option type. The trade benefits from the faster theta decay of the front-month short option versus the slower decay of the back-month long.
Maximum profit is harder to define exactly — it depends on where the underlying sits at the front-month expiration and what IV does. Approximately, the trade peaks when the underlying is at the strike at front-month expiration, with the back-month option still holding substantial extrinsic value.
Calendars work best in environments where short-term IV is high but long-term IV is expected to stay elevated. They struggle in IV-crush scenarios (the back-month option also loses value). Often used as a sideways-to-mildly-directional strategy with positive vega exposure.
Related terms
- Options Contract — A derivative giving the right (but not obligation) to buy or sell an asset at a set price by a set date.
- Theta — Time decay — how much an option loses in value per day as expiration approaches.
- Vega — Sensitivity of an option's price to a 1-point change in implied volatility.
- Vertical Spread — Two-leg options strategy: long and short of the same type at different strikes, same expiration.