Strategy guide
Calendar Spread Strategy
A calendar spread (time spread) sells a near expiration and buys a farther expiration at the same strike and type.
Strategy summary
- Market outlook
- neutral
- Risk type
- defined
- Capital requirement
- Net debit × 100
- Maximum profit
- Maximum near the shared strike as the front option decays
- Maximum loss
- Approximately the net debit
- Theta / vega
- positive / positive
- Assignment risk
- moderate
- Typical use
- Term-structure and time-decay trades
Payoff at expiration
The legs expire on different dates, so this is an approximation at the nearest expiration rather than a single-expiration payoff.
- Max profit-$200.00
- Max loss-$200.00
- Breakevens—
How Calendar works
It leans on faster time decay in the front option and the change in implied volatility between expirations.
Exact option legs
Sell near expiration + buy far expiration, same strike and type
- SELL 1 × $100.00 call expiring 2026-02-20 at $2.50
- BUY 1 × $100.00 call expiring 2026-04-17 at $4.50
Payoff, breakeven and risk
At expiration the position is worth the intrinsic value of each leg. The maximum profit is -$200.00, the maximum loss is -$200.00, and the position breaks even at a level outside the modelled range.
Worked example
With the underlying at $100.00:
- The calendar is opened for a 2.00 net debit.
- The chart shows an approximation at the front expiration, not the final payoff.
- Profit depends on the strike, term structure and volatility.
Strike selection
The shared strike is usually at or near the money where the front option decays fastest.
Expiration selection
Choose a front expiration that expires soon and a back expiration with enough time for the underlying to return to the strike.
Effect of time decay
This structure is positive on theta: net time decay works in its favour.
Effect of implied volatility
It is positive on vega: rising implied volatility helps.
Effect of stock movement
The position suits a neutral view, and it is tested most when the underlying moves outside the modelled strikes.
Assignment considerations
Assignment risk is moderate. Short legs can be assigned, especially when they are in the money or before a dividend; long legs have no obligation but can be exercised.
When it works poorly
- A large move away from the strike.
- Inverted term structure.
- Illiquid long-dated options.
Common mistakes
- Assuming a single-expiration payoff.
- Ignoring how term structure shifts after an event.
- Misjudging the front-option assignment risk.
Tax caveat
Option outcomes can receive different tax treatment from share trades, and assignment changes the holding period and cost basis. This is general information, not tax advice; confirm your situation with a qualified professional.
FAQ
- Why not show a simple payoff chart?
- The legs expire on different dates, so an expiration payoff is only an approximation.
- What is the main risk?
- A move away from the strike that leaves the long option worth less than the debit.
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Related concept guide.
Read guide Related conceptOptions Theta
Theta estimates how much value an option loses per day from the passage of time, all else equal.
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Vega estimates how much an option's price changes for a one-point change in implied volatility.
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Run the numbers with the shared options calculation library.
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