Calendar Spread
A calendar spread is an options strategy that involves selling a near-term option and buying a longer-term option at the same strike price, profiting primarily from the faster time decay of the short-dated contract.
The calendar spread — also called a time spread or horizontal spread — exploits the fact that options with the same strike price but different expiration dates decay at different rates. Near-term options lose time value faster than longer-dated ones, a phenomenon described by the options Greek theta. By selling the short-term option and buying the long-term option, the trader creates a position that benefits from the differential in decay rates as long as the stock stays near the strike.
Consider a trader who believes Microsoft (MSFT) will trade near $400 for the next month. They might sell a one-month $400 call and simultaneously buy a two-month $400 call. As the front-month contract decays rapidly toward expiration, the back-month retains more of its time value, and the spread widens in value. Maximum profit occurs when the stock closes right at the $400 strike at front-month expiration, at which point the trader can either close the trade or reassess the back-month position.
Calendar spreads are inherently a long-vega trade: they profit when implied volatility rises, because the back-month option benefits more from a volatility expansion than the short-dated front option. This makes calendars particularly interesting in the lead-up to scheduled events such as earnings announcements or Federal Reserve meetings, where IV often rises before the event and then collapses afterward.
The OCC clears all multi-leg options transactions in the U.S. market, including calendars, which require both legs to settle independently. Because front-month and back-month options have different expirations, there is rollover risk: if the front-month option is exercised early by a counterparty (possible with American-style equity options), the trader may need to act quickly to manage the resulting naked long-dated position.
A double calendar uses two calendar spreads at two different strikes — typically one above and one below the current price — to create a wider profitable zone. This is one of the most widely discussed neutral strategies among experienced options traders because of its favorable risk-reward profile in a stable, rising-volatility environment.