A calendar spread (or time spread) sells a near-term option and buys an option with a later expiry at the same strike. You pay a net debit and profit from the faster decay of the short option.
Example
The stock trades at 400. You sell the 400 call expiring this month for 9 and buy the 400 call expiring next month for 15. Your cost is 6.
How it makes money
- Best case: the stock sits near 400 at the first expiry. The short call expires nearly worthless while the long call keeps much of its value.
- A rise in implied volatility helps, because the longer option has more vega.
- Maximum loss is the debit paid, if the stock moves far away in either direction.
Things to know
Calendars are sensitive to volatility and can lose money if IV falls even when the price behaves. Exit or roll before the near-term option expires.
This article is for education only and is not financial advice. Options involve risk and are not suitable for every investor.