Calendar Spread
Selling a near-dated option and buying a longer-dated one at the same strike to exploit time decay.
Profit / Loss Diagram
Calendar Spread at the near expiration
What is this strategy?
The Calendar Spread is an advanced time-based strategy exploiting the differential theta decay between two options at the same strike but different expirations. It is built by selling a near-dated option and simultaneously buying a longer-dated one. The strategy is particularly effective when implied volatility is low or moderate.
It works because the near-dated option decays faster than the longer-dated one. As time passes, if price stays near the strike, the sold option loses value more quickly than the purchased one, generating a net gain. Once the near-dated option expires, you can sell another against your remaining long option, restarting the cycle.
The Calendar Spread suits neutral traders expecting little price movement in the short term. It is a positive-theta strategy requiring careful monitoring, particularly near the short option’s expiration. Margin requirements are typically lower than other multi-leg strategies, and risk is well defined.
Construction
| Action | Instrument | Strike | Expiration | Example |
|---|---|---|---|---|
| SELL | 1 Call (near-dated) | ATM | 30 DTE | -1 AAPL Mar 180 Call |
| BUY | 1 Call (longer-dated) | ATM (same strike) | 60 DTE | +1 AAPL Jun 180 Call |
Example
Scenario: AAPL at $180, implied volatility 25%. You expect it to stay neutral in the near term.
- Call Sold (March) -1 AAPL Mar 180 Call @ $3.00
- Call Purchased (June) +1 AAPL Jun 180 Call @ $5.50
- Initial Net Debit $250 (5.50 − 3.00 × 100)
- Maximum Gain $250+ (initial differential + volatility/time)
- Maximum Loss $250 (net debit paid)
- Breakeven Multiple points, depending on movement and time
- Scenario in March at $180 Short call expires worthless, you gain $300; the long call retains around $3.50
The Greeks
The long leg’s positive delta cancels the short leg’s negative delta. Small moves do not affect the position significantly.
Time decay favours the near-dated seller more quickly than it costs the longer-dated buyer, producing a net gain.
The longer-dated option accumulates more vega than the short one, so net vega is positive: the position gains if IV rises and suffers from IV crush. Ideal entry is at low IV with expectation of expansion.
Small negative gamma favours the strategy when price is stable and works against it on large moves.
Position Management
- 01 Monitor Near the Short Expiration At 5–7 days to expiration, the near-dated option decays rapidly. Consider closing the short leg to bank the theta gains.
- 02 Roll the Short Leg When the near-dated option expires, sell another at 30–45 days at the same strike against your still-live long option.
- 03 Adjust if Price Drifts Away If price moves more than 5–10% from the strike, close both legs or adjust to new strikes nearer the current price.
- 04 Handle Implied Volatility If IV rises significantly after opening, consider closing the long leg to capture the positive vega gains.
- 05 Continuous Cycle After closing, you can open a new calendar spread on the same underlying with fresh expiration periods.