Calendar Spread: Leveraging on Volatility For Maximum Gains

What is a Calendar Spread?

A calendar spread is a popular two-legged options strategy whereby an investor simultaneously sells (writes) and buys (holds) options with the same strike price, but with different expiration dates. Typically, this options strategy involves selling a near-dated (front-end) options contract while buying a longer-dated (back-end) contract.

How Does a Calendar Spread Work?

Considered a horizontal spread or a time spread, a calendar spread is a price-neutral strategy that benefits from time decay (A.K.A. theta) and rising levels of implied volatility (IV).

Shorter-dated options decay (lose value) faster than those with more days to expiration (DTE). For this reason, theta works in favor of the front-end short position, which decreases in price faster than the back-end long position.