Calendar Spread
An options strategy that sells a near-term option and buys a longer-dated option at the same strike price to profit from time decay.
What is Calendar Spread?
A calendar spread, also called a time spread or horizontal spread, involves selling (writing) an option with a near-term expiration and simultaneously buying an option with the same strike price but a later expiration, on the same underlying asset. The trade profits when the near-term option decays faster than the longer-dated option — a phenomenon driven by the non-linear nature of theta (time decay). Calendar spreads are typically used when a trader expects the underlying to remain near the strike price in the short term but anticipates a larger move or higher volatility later. Both calls and puts can be used; the maximum loss is the net premium paid.
Example
A trader believes a stock at $150 will remain range-bound for the next month before earnings. They sell the 1-month at-the-money call for $3.00 and buy the 2-month at-the-money call for $4.50, paying a net debit of $1.50. If the stock stays near $150 through the near-term expiration, the short call expires worthless and the trader retains the $3.00 premium against the $4.50 cost of the long call, now worth more than $1.50.