Calendar Spread
AdvancedA calendar spread is an options strategy that involves buying and selling options on the same asset with the same exercise price but different expiry dates, usually selling a shorter-dated option and buying a longer-dated one.
A calendar spread, also called a time spread or horizontal spread, aims to profit from the fact that options lose value faster as they approach expiry. The shorter-dated option sold loses value more quickly than the longer-dated option bought.
For example, with a share trading at 50, a trader sells a one-month call option with an exercise price of 50 for 2.00 and buys a three-month call with the same exercise price for 4.50, paying a net cost of 2.50. If the share price stays near 50 for the next month, the short option expires worthless or nearly so, while the long option keeps much of its value.
The strategy works best when the underlying price stays close to the exercise price until the near-term option expires. Large price moves in either direction can cause losses, which are limited to the net cost paid.
Calendar spreads are also sensitive to implied volatility. A rise in implied volatility usually benefits the position, because the longer-dated option is more sensitive to volatility than the shorter-dated one.
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