Calendar Spread

A Neutral Calendar Spread strategy (which is normally referred to as just a Calendar Spread) involves selling an At The Money (ATM) option in the near month (closest to Expiration) and buying the same option at the identical Strike Price but in the following month which has a longer period of time before Expiration (the far month). The effect of Theta (time decay) reduces the price of the sold or Short option faster than the Long option to expand the potential profit. Calendar Spreads are sometimes called 'Time Spreads'.

Calendar Spreads usually cost money to enter, i.e. they are debit trades. They have defined risk limited to the debit required to initiate the trade. Calendar Spreads can be implemented with either Calls or Puts. Neutral Calendar Spreads are non-directional trades



See the Profit & Loss diagram of the Calendar Spread at OptionCreator

Example

XYZ is currently trading at 100

Short 1 x At The Money 100 Strike Call Option (30 days to expiry) for (-3)
Long 1 x At The Money 100 Strike Call Option (60 days to expiry) for 5

Net debit to enter trade: (-2)

XYZ remains at 100 at expiration of short option

Short 1 x 100 Strike Call Option (near month) is At The Money and has no Intrinsic Value, profit = 3
Long 1 x 100 Strike Call Option (far month) has an Extrinsic Value of 3.5, loss = 1.5

Net profit = 1.5