A calendar spread (a.k.a. time or horizontal spread) sells a near-expiry option and buys a longer-dated option at the same strike. It profits because the near option decays faster than the far one — and it benefits if implied volatility rises.
The structure
- Sell 1 near-expiry option (fast theta decay works for you)
- Buy 1 far-expiry option, same strike (holds value longer)
You pay a net debit — that debit is your defined maximum loss. Best case: the underlying sits near the strike at the near expiry, the short leg expires cheap, and you keep the longer-dated long.
| Metric | Value |
|---|---|
| Max loss | Net debit paid (limited) |
| Best outcome | Underlying at the strike on the near expiry |
| Volatility | Long vega — a rise in IV helps the position |
When to use it
- You expect the underlying to stay near a strike in the short term
- Near-term IV is low and you expect it to rise into an event
- You want a defined-risk way to sell time decay without a naked short
Watch: a big directional move away from the strike hurts a calendar, and an IV crush in the far leg can offset the decay you collect. Model it before you trade.
Build a calendar in House of Trading and see the two-expiry payoff and defined risk before placing it on your own broker.