Calendar Spread

Call calendar spread: Sell a near-term call and buy a longer-term call at the same strike. Profits from the front-month call decaying faster than the back-month. Neutral to slightly bullish bias.

Put calendar spread: Sell a near-term put and buy a longer-term put at the same strike. Same mechanics as a call calendar but using puts. Neutral to slightly bearish bias. In practice, call and put calendars at the same strike have nearly identical risk/reward profiles.

Diagonal spread: Similar to a calendar spread but with different strike prices. Sell a near-term option at one strike and buy a longer-term option at a different strike. This adds a directional bias — a bull diagonal uses a lower long call strike and higher short call strike. Diagonals offer more flexibility but more complex risk management.

Double calendar spread: Combines a put calendar and a call calendar at different strikes, creating a wider profit zone. Example: sell a near-term $95 put and buy a longer-term $95 put, plus sell a near-term $105 call and buy a longer-term $105 call. Profits if the stock stays between $95 and $105 — a wider "tent" than a single calendar.

Reverse calendar spread: Buy the near-term option and sell the longer-term option. This is a short vega trade that profits from IV decline. Rarely used because it fights theta decay — the near-term option you bought decays faster than the one you sold.

Low-volatility, range-bound markets: Calendar spreads profit when the stock stays near the strike price. They are ideal during consolidation periods, low-volatility regimes, and when the stock is trading near a strong support or resistance level.

When IV is low but expected to rise: Calendar spreads have positive vega — they benefit when IV expands. If IV is currently depressed (IV rank below 20) and you expect a catalyst to push it higher, a calendar spread captures the IV expansion.

Earnings timing play: Sell a pre-earnings short-term option and buy a post-earnings longer-term option. The front-month option captures the IV crush while the back-month retains more value. This requires precise timing — the short option should expire just before or just after earnings.

When NOT to use: Avoid calendar spreads when you expect a large move — they lose money when the stock moves significantly in either direction. Also avoid them when the implied volatility term structure is flat (front-month IV equals back-month IV), because there is no theta differential to exploit.

Capital efficiency: Calendar spreads require less capital than buying stock or even buying single options. A typical calendar debit is $1-$5 for a potential profit of $2-$10, making them suitable for smaller accounts.

Profit target: Close the trade at 25-50% of maximum profit. The max profit occurs at the strike price on the short option's expiration, but waiting for that exact outcome is risky. Taking profits early is more consistent.

Loss limit: Close the trade at 50-75% of the debit paid. If you paid $3.00 for the calendar, close it if the value drops below $0.75-$1.50. This prevents a total loss of the premium.

Rolling the short option: If the short option expires worthless (stock is away from the strike), you still own the long option. You can sell another short-term option against it to create a new calendar — "rolling" the trade. This turns a single calendar into a multi-cycle income strategy.

Adjusting for directional moves: If the stock moves away from the strike, the calendar loses value. You can "roll" the strikes by closing the current calendar and opening a new one centered at the current stock price. This resets the trade but costs additional debit.

Greeks to monitor: Watch theta (should be positive — the spread decays in your favor) and vega (a rise in IV helps; a drop in IV hurts). If vega shifts against you (IV drops unexpectedly), consider closing early rather than holding to expiration.