CALENDAR SPREAD
Overview
Sell a short-dated option and buy a longer-dated option at the same strike. The near-term option decays faster, so you profit from the difference in time decay rates. Maximum value is captured when the stock is near the strike at front-month expiration — the back-month option still has value while the front month has expired worthless.
What it does
You're exploiting the fact that near-term options decay faster than long-term options. By selling the short-dated option and buying the long-dated one at the same strike, you capture the difference in their time decay rates. The near-term option erodes toward zero while the back-month retains most of its value. Maximum profit occurs when the stock is near the strike on front-month expiration.
Structure
sell 1 near-term option + buy 1 longer-term option
Setup
- 1.Sell 1 near-term option (call or put) at your target strike.
- 2.Buy 1 longer-term option at the exact same strike.
Max profit
Limited. Maximized when the stock closes exactly at the strike on front-month expiration. Residual back-month value determines the exact amount.
Max loss
Net Debit Paid. The most you can lose is the cost to enter the spread.
Breakeven
Depends on implied volatility in the back month when the front month expires — requires risk software to model precisely.
When to use
When you expect the stock to stay near a price target for the near term. Benefits from a jump in IV after entry, as back-month value rises faster.
When to avoid
When expecting a large directional move or a significant collapse in implied volatility.
Example trade
Stock: SPY at $430 Sell 1 SPY $430 Call (30-day) at $4.50 Buy 1 SPY $430 Call (60-day) at $6.20 Net Debit: $1.70 ($170) If SPY stays near $430 at front-month expiration: Short call expires worthless; back-month call still worth ~$3.00 Profit ≈ ($3.00 - $1.70) × 100 = $130 If SPY moves far from $430: Both legs lose similar value; small loss
Common mistakes
- ×Entering in a strongly trending market — large moves away from the strike destroy both legs' value.
- ×Using illiquid expirations — wide bid-ask spreads on multi-expiration structures can be expensive.
- ×Forgetting to manage at front-month expiration — the strategy requires active management when the short leg expires.
- ×Ignoring IV differences between expirations — if back-month IV is much higher than front-month, entry is expensive.
- ×Not understanding that P&L is path-dependent and hard to model without software.
FAQ
What happens when the front-month option expires?
You're left with the long back-month option. You can sell another near-term option to create a new calendar, or close the remaining long option.
Is a calendar spread bullish or bearish?
Standard (call or put) calendars are usually neutral. You can create a directionally biased calendar by selecting a strike above or below the current price.