Neutral · Time & volatility
Calendar
Spread
A trade on time, not direction. Sell the fast-decaying near-term option, own the slower longer-term one, and profit if price sits near the strike. Here's how it works.
What it is
A calendar spread (time/horizontal spread) sells a near-term option and buys a longer-term option at the same strike. Because the near-term option loses time value faster (theta accelerates into expiry), the short leg decays quicker than the long leg — a profit if the underlying stays near the strike.
Key facts
- Market view: neutral, expecting price to stay near the strike; benefits from rising IV.
- Construction: Sell 1 near-term option + Buy 1 longer-term option (same strike).
- Net cost: a debit (the longer-dated option costs more).
- Max profit: around the strike at near-term expiry (depends on remaining value of the long leg).
- Max loss: limited to the net debit paid.
- Key Greeks: positive theta (collects decay) and positive vega (gains if IV rises).
A rounded hump peaking at the strike — profit if price sits near it at the near-term expiry, with loss capped at the debit.
When to use it
- You expect the underlying to be range-bound near the strike in the short term.
- IV is low and likely to rise — the long leg gains from a vega bump.
- You want a defined-risk way to harvest near-term time decay.
Risks to respect
- A large move in either direction erodes the position toward the max loss.
- Falling IV hurts the long leg (negative for the spread).
- Two expiries add management complexity around the near-term expiry.
Model a calendar live
See the hump payoff, theta and vega on TradePulse's strategy builder before placing a calendar spread.
Related strategies
- Long Straddle — long volatility, both directions.
- Iron Condor — defined-risk range income.
- Theta — the decay this strategy harvests.