A calendar spread buys a longer-dated option and sells a shorter-dated option at the same strike. The idea is to sell faster-decaying time while keeping longer-dated exposure.
Calendars are often misunderstood as simple income trades. They are really timing trades: you want the stock near the strike as the short option decays.
Calendar spread expiration sketch
The short-dated leg wants the stock near the strike. This sketch shows the near-term expiration shape.
Example shown: near-term short call component only.
The longer option keeps value after the near-term option expires.
When it fits
Use calendars when you expect the stock to move slowly or pin near a level. They can also express a view that near-term options are overpriced compared with later options.
Choosing the strike
Place the strike near where you expect the stock to be when the short option expires. At-the-money calendars are more neutral. Out-of-the-money calendars lean bullish or bearish depending on strike placement.
What can go wrong
A fast move away from the strike can hurt. A drop in implied volatility can hurt the longer option. Assignment risk can appear if the short option goes in the money near expiration, especially around dividends.
Execution playbook
Use this section to turn the setup into a broker-screen plan: selection, follow-up action, risk limits, and reasons to skip the trade.
Key execution ideas
- Neutral calendars want the stock near the strike when the short option expires.
- Bullish calendars move the strike above the current stock price.
- Using multiple expiration series changes the time-decay profile.
Before entering the order
- Sell the near-term option and buy the later option at the same strike.
- Place the strike where you expect the stock to sit at near-term expiration.
- Check whether near-term volatility is rich or cheap relative to later volatility.
Follow-up action
- Close or adjust if the stock moves too far away from the strike.
- Buy back the short option before assignment risk becomes the main issue.
- Keep the long option only if it still fits the next trade.
Skip the trade when
- You expect a fast directional move.
- The long option is overpriced relative to the short option.
- You cannot monitor assignment and event risk around the short leg.
Options can lose money quickly. Treat every setup as a defined plan: entry, maximum loss, adjustment trigger, exit target, and a reason to skip the trade when pricing is not favorable.