A Guide to the Calendar Spread

The calendar spread is one of the better options spreads in my opinion. It is what I refer to as an advanced spread because it is relatively simple to someone who understands options but it can hurt you in ways you will not realize until it's too late. Hopefully after reading this you will be well prepared to use these spreads in a relatively simplistic way.

The basics of a long calendar spread are that it is one long option that has a long expiration date and a short option with the same strike price that has a shorter expiration. This long calendar spread has many different parts associated with it. Since you are paying a premium for the spread (because you are long the option with a farther out expiration), you are subject to volatility. In this case, you are betting that volatility will go up, as you will make more money on your long option than you will lose on your short option. If the option is a call, your delta will be positive and you will make money as long as the option is out of the money until the short option expires. If the option is a put then your delta is negative and you will make money at all points between the stock price and the strike price. The reason that you don't make money after the price passes the strike price prior to the short expiration is that since you pay a premium on long calendars so your loss will be the premium paid for the spread. The last thing that you need to pay attention to with these spreads is theta, or time decay. The time decay on these options means that as you hold the option, the price of those contracts is net decaying, so even if the price and volatility stay the same you end up losing out. Obviously if you let both options expire out of the money you lose your premium as a result of this time decay, which should be evident if you've been studying options.

Short calendar spreads are essentially the same as long spreads but in reverse. Instead of being subject to time decay, the short calendar spreads actually make money as time goes along because you are net short. Your delta is the opposite, so a short calendar call spread will give you negative delta while a short put calendar spread will give you positive delta. Since you are now net short options instead of being long, you also are essentially making the bet that volatility will be going down, since if it goes up the price of your options will also rise and that will be a negative for you.