Calendar spreads can be done with calls or puts and, if using the same strikes, put and call calendar spreads are virtually equivalent. Implementing the strategy involves buying one option and selling another option of the same type and strike, but with different expiration. A long calendar spread would entail buying an option (not a "front month" contract) and selling a nearer-expiration option of the same strike and type. Long calendar spreads are traded for a debit, meaning you pay to open the overall position.

This strategy profits in a limited range around the strike used. The trade can be set up with a bullish, bearish or neutral bias. The greatest profit will come when the underlying is at the strike used at expiration. Calendar spreads also profit from a rise in implied volatility, since the long option has a higher vega than the short option.

Calendar spreads lose if the underlying moves too far in either direction. The maximum loss is the debit paid, up until the option you sold expires. After that, you are long an option and your further risk is the entire value of that option.

Options in nearer-month expirations have more time decay than later months (they have a higher theta). The calendar spread profits from this difference in decay rates. This trade is best used when implied volatility is low and when there is implied volatility "skew" between the months used, specifically when the near-month sold has a higher implied volatility than the later-month bought.

In this example, with the stock at 135.13, the September 135 call is purchased for $15.45, and the July 135 call is sold for $10.45, for a net debit of $5, which is the maximum risk.






This is a neutral trade used when the outlook is for a range-bound underlying. The maximum risk is known from the outset of the trade, and is equal to the debit paid (until the first expiration). If the implied volatility does not change, the position profits from roughly 121 to 154. Rises in implied volatility will increase the profit and the range. Time decay is on your side with this trade.