Calendar Spread (Time Spread) — Options Strategy

A calendar spread, also called a horizontal or time spread, involves selling a near-dated option and buying a longer-dated option of the same strike and same type (both calls or both puts) on the same underlying. It is a short-theta on the near month and long-theta on the far month — net position benefits from time decay being faster on the front month.

Calendar spreads are typically delta-neutral at initiation and profit if the underlying stays near the strike through near-term expiry. The longer-dated option retains its time value, while the near-dated option decays away.

Profit drivers: (a) Time decay (theta) is steeper on the near-dated leg; (b) volatility rises on the long-dated leg (vega is positive net); (c) underlying stays near the strike.

Example 1: Nifty at 24,000. Trader sells the 24,000 weekly call for 120 and buys the 24,000 monthly call for 280. Net debit = 160. If Nifty stays near 24,000, the weekly call expires near zero, and the monthly call still has ~150-200 of time value, leaving the trader near breakeven or profit. If Nifty moves sharply away from 24,000 in either direction, the long-dated call loses value faster than the gain on the short weekly, and the trade loses.

Example 2: A trader sells a 7-DTE put and buys a 30-DTE put at the same strike on a low-IV stock expecting IV expansion. The trade benefits from front-month theta decay and any vol pickup on the back month — a double tailwind if the underlying stays put.

Diagonal spread is a close cousin where the long-dated leg has a different strike from the short-dated leg, giving directional bias to the trade.

Disclaimer: Educational content from MintByte (ARN-314872, MFD). Examples are illustrative. SEBI Investment Adviser registration is in process; we do not recommend specific options trades.