All option guides
Time spread3 minute read
What is a calendar spread?
Understand a spread that uses options with different expirations and why time and IV matter together
Prepared by Mark · Primary sources below
Direct answer
A calendar spread generally sells a nearer-dated option and buys a longer-dated option of the same type and strike. The different expirations make the position sensitive to the relative effects of time decay, implied volatility, and the underlying price. Its outcome at the near option's expiration is not defined by a single stock-price break-even alone
Different expirations are the defining feature
A typical call calendar sells a short-term call and buys a longer-term call at the same strike. A diagonal spread changes both the expiration and the strike, creating a different payoff profile
Time and volatility interact
The nearer-dated option generally has less time value and can decay differently from the longer-dated option. The two options can also have different vegas, so an IV change need not affect both legs equally
Near-term assignment remains possible
The short near-term option can be assigned under its contract terms. If it is exercised, the longer-dated option remains open, so exercise, stock settlement, and the remaining option must be considered together
Sources and further reading
Start from the contract you are considering
Choose an option and target so the analysis can separate the stock, time, and volatility conditions behind the outcome
Analyze my option