What is a 'Calendar Spread'

A calendar spread is an options or futures spread established by simultaneously entering a long and short position on the same underlying asset at the same strike price but with different delivery months. Sometimes referred to as an inter-delivery, intra-market, time, or horizontal spread.

The typical options trade comprises the sale of an option (call or put) with a near-term expiration date, and the simultaneous purchase of an option (call or put) with a longer-term expiration. Both options are of the same type and use the same strike price.

  • Sell near-term put/call
  • Buy longer-term put/call
  • Preferable but not required that implied volatility is low

The purpose of the trade is to profit from the passage of time and/or an increase in implied volatility in a directionally neutral strategy.

BREAKING DOWN 'Calendar Spread'

Since the goal is to profit from time and volatility, the strike price should be as near as possible to the underlying asset's price. The trade takes advantage of how near- and long-dated options act when time and volatility change. An increase in implied volatility, all other things held the same, would have a positive impact on this strategy because longer-term options are more sensitive to changes in volatility (higher vega). The caveat is that the two options can and probably will trade at different implied volatilities.

The passage of time, all other things held the same, would have a positive impact on this strategy in the beginning of the trade until the short-term option expires. After that, the strategy is only a long call whose value erodes as time elapses. In general, an option's rate of time decay (theta) increases as its expiration draws nearer.

Maximum Loss on a Calendar Spread

Since this is a debit spread, the maximum loss is the amount paid for the strategy. The option sold is closer to expiration and therefore has a lower price than the option bought, yielding a net debit or cost.

The ideal market move for profit would be a steady to slightly declining underlying asset price during the life of the near-term option followed by a strong move higher during the life of the far-term option, or a sharp move upward in implied volatility.

At the expiration of the near-term option, the maximum gain would occur when the underlying asset is at or slightly below the strike price of the expiring option. If the asset were higher, the expiring option would have intrinsic value. Once the near-term option expires worthless, the trader is left with a simple long call position, which has no upper limit on its potential profit.

Basically, a trader with a bullish long-term outlook can reduce the cost of purchasing a longer-term call option.

Example of a Calendar Spread

With Exxon Mobile stock trading at $89.05 in mid-January, 2018:

  • Sell the February 89 call for $0.97 ($970 for one contract)
  • Buy the March 89 call for $2.22 ($2,220 for one contract)

Net cost (debit) $1.25 ($1,250 for one contract)

RELATED TERMS
  1. Currency Option

    A contract that grants the holder the right, but not the obligation, ...
  2. Ratio Spread

    A ratio spread is a neutral options strategy in which an investor ...
  3. Reverse Calendar Spread

    A reverse calendar spread is a type of unit trade that involves ...
  4. Listed Option

    A listed option is a derivative security traded on a registered ...
  5. Call Option

    A call option is an agreement that gives the option buyer the ...
  6. Strike Price

    Strike price is the price at which the underlying asset of a ...
Related Articles
  1. Trading

    An Option Strategy for Trading Market Bottoms

    A reverse calendar spread offers a low-risk trading setup with profit potential in both directions.
  2. Trading

    Pencil in Profits in Any Market With a Calendar Spread

    Calendar spreads are a great way to combine the advantages of spreads and directional option trades in the same position.
  3. Trading

    The Basics of Options Profitability

    Learn the various ways traders make money with options, and how it works.
  4. Trading

    Options Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  5. Trading

    Out-Of-The-Money Put Time Spreads

    Learn about this low-risk, bearish options strategy used to speculate on major market declines.
  6. Trading

    Understanding Bull Spread Option Strategies

    Bull spread option strategies, such as a bull call spread strategy, are hedging strategies for traders to take a bullish view while reducing risk.
  7. Trading

    Which Vertical Option Spread Should You Use?

    Knowing which option spread strategy to use in different market conditions can significantly improve your odds of success in options trading.
  8. Trading

    Call options: Right to buy versus obligation

    Learn what a call option is, how buyers and sellers are determined, and what the difference between a right and an obligation is for options investors.
RELATED FAQS
  1. What's the difference between a credit spread and a debit spread?

    Learn about debit and credit option spread strategies, how these strategies are used, and the differences between debit spreads ... Read Answer >>
  2. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
  3. What is spread hedging?

    Learn about one of the most common risk-management strategies options traders use, called spread hedging, to limit exposure ... Read Answer >>
  4. Implied Volatility

    Implied volatility is an important concept in option trading. Learn how it is calculated using the Black-Scholes option pricing ... Read Answer >>
Trading Center