What is an option calendar spread?

An option calendar spread is an options trading strategy in which you buy one option contract while simultaneously selling another of the same type (calls or puts). This means that you open two positions at once - one long, one short - with identical strike prices and underlying assets but different expiration dates.

Also known as a time spread or a horizontal spread strategy, this trading strategy capitalizes on potential differences in option prices due to the passage of time or increased implied volatility. A typical calendar spread involves contracts with the same underlying asset and the same strike price.

How an option calendar spread works

A calendar spread works by taking advantage of how options lose value at different rates as they approach expiration. Here are the key steps:

1. Setting up the trade: You sell an option contract and buy another. Both contracts will have the same strike price and underlying asset. A calendar spread consists of positions in which traders usually sell a near-term option that expires soon and buy a long-term one that expires later, covering the same underlying asset.
2. Making profit: Calendar spreads can make money from time decay. As time passes, the short-term option you sold loses value faster than the long-term option you bought. This spread creates your potential profit.
3. Managing risk: If you believe market conditions will change, you can always adjust your position accordingly. For example, you may close your position early or extend the expiration date of your options contract.

Calendar spread examples

Long call calendar spread

For this example, let's say that Amazon (AMZN) is trading at $200 per share and you are mildly bullish on its potential over the next few months. You decide to use a long call calendar spread and choose a strike price of $205.

You sell 1 AMZN call expiring in 60 days for $5. You buy 1 AMZN call expiring in 120 days for $14. This creates a net cost of $9 per share ($14 - $5). With each option contract covering 100 shares, your total investment equals $900, which also represents the maximum potential loss as your defined risk.

After 60 days, let's assume AMZN moves to $206. The short call expires with minimal value since it's only slightly in-the-money. Meanwhile, your longer-dated call still holds substantial time value and is worth $18. You could close the position by selling this remaining call for $1,800. Your profit would be $900 ($1800 - $900 initial cost).

Alternatively, if AMZN drops to $180 when the near-term option expires, both calls lose significant value. The short call would be worthless, and your long call may only be worth $500, resulting in a $400 loss from your original cost of $900.

Short call calendar spread

Let's suppose the underlying Microsoft (MSFT) stock is trading at $500 per share, and you expect increased volatility due to an imminent earnings release. You decide to use a short call calendar spread using a strike price of $550.

You buy 1 MSFT call expiring in 60 days for $50. You sell 1 MSFT call expiring at 180 days for $70. This creates a net cost of $20 per share ($70 - $50). With each option contract covering 100 shares, you receive $2,000 - this is your maximum potential profit.

If MSFT surges to $600 after 60 days, the short call you bought ends up significantly in-the-money and might be valued at $100. Meanwhile, the longer-dated call you sold is now worth $120. You would close your positions with a $30 profit per share ($100 - $120 + 50) or $300 for the spread.

However, if MSFT drops to $400 instead, causing both calls to expire worthless, you will retain your original $2,000 credit as profit.

Long put calendar spread

Let's imagine Apple (AAPL) is trading at $180 per share and you expect it to decline moderately over the next few months. You decide to establish a long put calendar spread using the $175 strike price.

You sell 1 AAPL $175 put expiring in 60 days, collecting $6. You buy 1 AAPL $175 put expiring in 120 days, paying $12. This creates a net cost of $6 per share ($12 - $6). Your total investment equals $600.

After 60 days, let's assume AAPL declines to $174. The short put expires with $1 intrinsic value, costing you $100 to close. Your longer-dated put might now be worth $7.50 ($750) as it is slightly in-the-money. Your net position value is $650 ($750 - $100), giving you a profit of $50 ($650 - $600 initial cost) if you close your positions.

Alternatively, if AAPL rises to $185 when the near-term expiration occurs, both puts lose significant value since they're out-of-the-money. The short put expires worthless, but your long put might be worth only $200, which would result in a $400 loss from your original $600 investment.

Short put calendar spread

Let's suppose Nvidia (NVDA) is trading at $800 per share, and you expect significant volatility due to upcoming AI chip announcements and want to profit from large price movements in either direction. You decide to establish a short put calendar spread using a strike price of $780.

You buy 1 NVDA $780 put expiring in 60 days, paying $18. You sell 1 NVDA $780 put expiring in 120 days, collecting $32. This creates a net credit of $14 per share ($32 - $18). This means that you receive $1,400 upfront.

After 60 days, if NVDA drops to $750, your short-term put has $30 intrinsic value ($780 - $750), while the longer-term put you sold might be worth $35. You would pay $3,000 to close the short put and $3,500 to buy back the long put, totalling $6,500 in costs against your $1,400 credit, leaving you with a $5,100 loss.

However, if NVDA rises to $820 when the near-term option expires, both puts are out-of-the-money. The short put expires worthless, and you might buy back the long put for $8, resulting in a closing cost of $800 and a profit of $600 from your original $1,400 credit.

Executing a calendar spread

The goal of a calendar spread strategy is to profit from the passage of time and increased implied volatility. Start by selecting a strike price close to the underlying stock price, as this gives you a greater opportunity to benefit from potential time decay differences between your options.

Choose your entry timing wisely. Avoid entering trades immediately before major news events, such as earnings releases, as large price swings can hurt your position regardless of which direction the stock moves.

You should also monitor both options as the shorter-term expiration date approaches. You'll need to decide whether to close the position early, let the short option expire, or roll it to a later date. Having a clear exit plan before entering the trade helps you practice risk management and lock in profits when they appear.

Pros and cons of calendar spreads

Pros of calendar spreads:

• The advantage of time decay: Calendar spreads profit from the faster time decay of short-term options compared to longer-dated contracts.
• Controlled risk: Your maximum loss is clearly defined upfront as the net premium paid for long calendar spreads.
• Less capital: The premium collected from selling the near-term option partially offsets the cost of buying the longer-term option. This requires less capital than outright purchase of options.
• Flexibility: Calendar spreads can be adjusted as circumstances change - simply roll expired options to new dates or close positions early.

Cons of calendar spreads:

• Limited profit potential: Your maximum gains are capped and typically only occur when the underlying asset's price trades exactly at your strike price.
• Sensitivity to volatility: Decreases in implied volatility can significantly hurt calendar spreads, as longer-term options lose more value than shorter-term contracts.
• Early assignment: If your short option moves in-the-money, you face potential early assignment before the expiration date. This forces your position to close at undesirable times, hurting your profit.
• Complexity: Managing multiple expiration dates and strike prices requires constant monitoring and a good understanding of options. Mistimed adjustments or poor entry execution can majorly reduce potential profitability.

Are there other option spread strategies?

Options traders have access to a wide range of spread strategies beyond calendar spreads, each designed for different goals and market conditions in derivative markets.

Notable alternatives include volatility strategies like straddles and strangles, butterfly spreads for range-bound markets, protective puts and covered calls. Each of these strategies requires a good understanding of the underlying asset.

Ready to start trading calendar spreads?

The StoneX futures and options team is on hand to help you identify and capitalize on new trading opportunities across global futures exchanges. With direct market access and clearing, you'll have everything you need to execute your calendar spreads confidently. Choose from a free proprietary platform, third-party solutions or broker-assisted trading – get started at futuresonline.com.

Useful links

For more insights on other option trading strategies, visit our glossary entries:

• Call options
• Put options

And to stay up to date with expert analysis, tune into our StoneX podcasts.

Calendar spread FAQs

What is the difference between a long calendar spread and a short calendar spread?

The major difference between these two types of calendar spreads is in the trader's intention. A long calendar spread involves buying a longer-term option and selling a near-term option, intending to profit from the time decay of options with different expiration dates.

On the other hand, a short calendar spread involves selling a longer-term option and buying a near-term option, with the goal of taking advantage of an increase in volatility.

What is the goal of a calendar spread strategy?

The goal of a calendar spread strategy is to profit from time decay, through the passage of time, and increased volatility.

What are the best time frames for calendar spreads?

There is no definitive 'best' time for a calendar spread, as it depends on your objectives and market conditions. Before you trade, consider earnings, economic data releases, and other events likely to affect volatility and market sentiment.

What's the difference between a calendar spread and a diagonal spread? 

A calendar spread consists of options with the same strike price, but differing expiration dates. Meanwhile, diagonal spreads feature different strike prices and expiration dates.

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This material is for informational purposes only and should not be considered as an investment recommendation or a personal recommendation.