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Calendar Spreads

advanced7 min read

Selling near-term and buying longer-term options to harvest faster time decay.

A calendar spreadSelling a near-dated option and buying a longer-dated one. (a “time spreadSelling a near-dated option and buying a longer-dated one.”) trades optionsThe right, not the obligation, to buy or sell at a set price. across different expiries at the *same strikeThe fixed price at which an option can be exercised.*: you sell a near-term optionThe right, not the obligation, to buy or sell at a set price. and buy a longer-term one. Unlike the other strategies, it’s built to exploit the difference in how fast the two options decay.

The engine of a calendar spreadSelling a near-dated option and buying a longer-dated one. is the fact that theta accelerates near expiry — so the near-term optionThe right, not the obligation, to buy or sell at a set price. you sold decays faster than the longer-term optionThe right, not the obligation, to buy or sell at a set price. you bought. You pocket that difference in decay rates. It’s a bet that the stock stays *near the strikeThe fixed price at which an option can be exercised.* (so both options behave as expected) while time does the work: the short option melts quickly, the long option holds its value better, and the gapA jump between one bar’s close and the next bar’s open. is your profit. A calendar is also *long vegaHow much an option’s price changes when volatility changes.* — it benefits if volatilityThe size of price swings — not their direction. rises — making it a way to be neutral on direction but positioned for calm-now, movement-later (e.g. selling cheap front-month decay before an event the back-month captures). You’re harvesting the *term structure of time decayHow much an option loses in value each day from time passing.*.
ExampleStock at ₹1,000. Sell this week’s ₹1,000 callThe right, not the obligation, to buy or sell at a set price. and buy next month’s ₹1,000 callThe right, not the obligation, to buy or sell at a set price.. If the stock hovers near ₹1,000, the weekly callThe right to buy the underlying at a set price — a bullish bet. you sold decays to near zero (you keep that premium) while your monthly callThe right to buy the underlying at a set price — a bullish bet. retains most of its value — the decay gapA jump between one bar’s close and the next bar’s open. is your gain. You then often roll, selling another weekly against the same long call.
Key takeawayA calendar spreadSelling a near-dated option and buying a longer-dated one. sells a near-term optionThe right, not the obligation, to buy or sell at a set price. and buys a longer-term one (same strikeThe fixed price at which an option can be exercised.) to harvest the faster decay of the near optionThe right, not the obligation, to buy or sell at a set price. (theta accelerates near expiry). It profits if price stays near the strikeThe fixed price at which an option can be exercised., is long vegaHow much an option’s price changes when volatility changes. (likes rising volatilityThe size of price swings — not their direction.), and is direction-neutral — harvesting the term structure of decay.
FAQs
What’s the main risk of a calendar spread?

A large move *away* from the strike (which hurts both legs’ alignment and pushes you out of the profit zone) and a *fall* in implied volatility (since calendars are long vega). It’s a strategy for range-bound expectations with stable-to-rising volatility; a big directional move or a volatility crush works against it.