Calendar Spreads

Two months, one strike, one bet

A calendar spread changes the variable. Instead of stacking legs across different strikes, you stack them across different expirations. Same strike, two months. You sell the option in the near-month and buy the same-strike option in a further-out month. The trade is a net debit — you pay a small amount up front. That debit is your max loss.

How does it make money? Time decay is not linear. Near-month options decay much faster in the final weeks than far-month options. So even though both legs are losing extrinsic value, the short option (which you owe) is losing value faster than the long option (which you own). That gap is the profit engine. As long as price stays near the strike, every day that passes widens the gap.

There is a second engine: implied volatility expansion. The long back-month option has more vega than the short front-month option, so if IV rises after entry, the back-month gains more value than the front-month loses. That is unusual — most premium-selling structures are short vega and want IV to fall. A calendar wants IV to rise.

Practical entry: pick a strike near the current price, sell the front-month expiring in 20 to 30 days, buy the back-month expiring 60 to 90 days out. Defined risk is the debit. Max profit is messier — it depends on where the underlying lands at the front-month expiry and where IV sits — but it generally falls in the range of one to two times the debit. Brokerage platforms can show you a projected P&L surface, which is the easiest way to size the trade.

Recap: calendar = short near-month + long back-month, same strike. Net debit. Wins on differential time decay plus IV expansion. Wants price near the strike and IV rising.