Definition
Calendar Spread (Options)
A calendar spread sells a near-term option and buys a longer-term option at the same strike to profit from time decay and volatility.
Also called a horizontal or time spread, it exploits the fact that the near-month option decays faster than the far-month one. You sell the weekly or current-month option and buy the next-month option at the same strike, profiting if the underlying stays near the strike while the front leg decays.
On the NSE, calendar spreads are used on Nifty and stocks when a trader expects calm in the short term but holds a longer view, or wants to play a rise in implied volatility (the long leg has more vega). Managing them requires watching the relative IV between expiries, which can move against the position.
Related terms
- VegaVega measures how much an option's premium changes when implied volatility rises or falls by 1%.
- Ratio SpreadA ratio spread buys and sells options in unequal numbers, such as buying one call and selling two, to lower cost or add credit.
- Calendar Spread (Futures)A futures calendar spread buys one expiry and sells another of the same underlying to trade the spread, not direction.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.