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OPTIONS STRATEGIES·NEUTRAL·2 LEGS

Calendar spread

Sell a near-term option, buy a far-term option at the same strike. Profits from the near-term decaying faster than the far-term. Best when stock pins the strike at near-term expiry.

INPUTS
Underlying price
$
Centers the payoff chart and computes P&L at this price.
LEGS
Short near-term
Type
Side
Strike
$
Qty
Premium
$
Long far-term
Type
Side
Strike
$
Qty
Premium
$
RESULT
BE $100.00spot $100.00
$60.001 strike$140.00
P&L at current spot (expiry)
−$150
Net debit−$150
Max profitUnlimited
Max loss−$150
Breakeven$100.00
Note: Max profit varies — depends on IV and time decay; peak when near-term expires ATM.
RISK PROFILE
Max profit
Variable — depends on IV and time decay
Max loss
Net debit paid
Breakeven
Approximated near the strike at near-term expiry
HOW IT WORKS

How a calendar spread works

A calendar spread sells a near-term option and buys a longer-dated option at the same strike. It is a bet on time rather than direction: the front-month option decays faster than the back-month one, and the position captures the difference.

The reason it works is that time decay is not linear. An option loses extrinsic value slowly at first and much faster in its final weeks. Selling the contract that is in its steep phase and owning the one still in its gentle phase means the short leg loses value faster than the long leg, and the spread widens in your favour.

Maximum profit occurs when the stock sits at the strike as the front month expires — the short option expires worthless while the long one retains most of its value. The position is also long vega on balance, so rising implied volatility helps and falling volatility hurts, which is the opposite of most income structures.

WORKED EXAMPLE

A worked example

XYZ trades at $100 and you expect it to stay near that level for the next month. You sell the 30-day $100 call for $3.00 per share and buy the 60-day $100 call for $4.50.

Net debit
$4.50 − $3.00 = $1.50 × 100 = $150 (max loss)
Best case
XYZ at $100 on the front expiry — short leg expires worthless, long leg retains value
If XYZ = $100 at day 30
Short expires at $0; the 30-day $100 call is worth roughly $3.00 → about +$150
If XYZ = $130 at day 30
Both legs deep in the money, spread collapses toward $0 → near −$150
If XYZ = $70 at day 30
Both legs near worthless, spread collapses → near −$150

Note the two failure modes are identical — a big move in either direction kills it. Unlike the other structures here, the exact profit depends on what implied volatility does to the back month, so the middle row is an estimate rather than arithmetic.

FIT

When a calendar spread fits — and when it doesn't

Consider it when
  • You expect the stock to stay near a specific price over the near term.
  • Front-month implied volatility is elevated relative to the back month, so you sell the expensive leg and buy the cheaper one.
  • You want a defined-risk way to sell time without an undefined tail.
Think twice when
  • You expect a large move. Both directions are losing outcomes.
  • An earnings report falls between the two expiries — the front month will be priced for it and the back month will be crushed after it.
  • The back month is illiquid. Exiting a calendar means closing two different expiries, and a wide market on either one eats the edge.
FAQ

Common questions

What is the maximum loss on a calendar spread?

The net debit paid. Selling the 30-day at $3.00 and buying the 60-day at $4.50 risks $150 per contract, which is what you lose if the stock moves far from the strike in either direction.

Why does a calendar spread profit from time?

Time decay accelerates as expiry nears. The short front-month option is in its steepest decay phase while the long back-month option is not, so the short leg loses value faster than the long one.

What happens to a calendar spread if volatility rises?

It generally helps. The longer-dated option you own is more sensitive to volatility than the shorter-dated one you sold, so the position is net long vega.

What is the difference between a calendar and a diagonal spread?

A calendar uses the same strike in both expiries and is purely a time trade. A diagonal uses different strikes, which adds a directional component on top.

RELATED STRATEGIES
Diagonal spread
Directional + time · Different strikes, different expirations.
Iron butterfly
Short volatility · Pin risk play, max profit at the short strike.
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