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CALENDAR SPREADS

Core Concept: Sell near-term option, buy longer-term option (same strike) to profit from faster theta decay of short option.

Why It Matters​

Calendar spreads isolate time decay while minimizing directional risk. Profit when stock stays near strike and near-term volatility decreases.

When to Use​

✅ Use calendar spreads when:

  • Stock expected to stay flat short-term
  • Near-term IV > long-term IV (sell expensive, buy cheap)
  • Want theta strategy with less directional risk
  • After earnings (sell post-earnings, buy pre-earnings)

❌ Avoid when:

  • Expecting large move either direction
  • Both expirations have similar IV
  • Low liquidity in either expiration
  • Don't understand vega impact

Strategy Mechanics​

Setup: Sell option (30-45 DTE), buy option (60-90 DTE), same strike
Max profit: When stock = strike at front-month expiration
Max loss: Net debit paid (if stock moves far from strike)
Breakeven: Complex (depends on IV and time)

Ideal outcome: Short option expires worthless, long option retains value

Trade-offs​

Pros: Lower directional risk, profits from theta differential, benefits from IV skew
Cons: Complex to manage, vega-sensitive, limited profit potential, requires two adjustments

Calendar spreads exploit options_greeks theta difference and options_expiration timing.

Quick Reference​

Position Greeks:

  • Delta: Near-zero (neutral)
  • Gamma: Negative (risk if stock moves)
  • Theta: Positive (front-month decays faster)
  • Vega: Positive for back month, negative for front (complex)

Setup guidelines:

ComponentDetails
StrikeATM or slightly OTM
Short exp30-45 DTE
Long exp60-90 DTE
Cost$1-3 typical debit
Target profit25-50% of debit

Vega considerations:

  • Front month IV drop = profit (short option loses value)
  • Back month IV rise = profit (long option gains value)
  • Best when term structure inverted (near>far IV)

Management:

  • Close at 25% profit (theta captured)
  • Roll or close if stock moves >5% from strike
  • After front expires: Sell next month against long

Examples​

EXAMPLE

Standard calendar spread:

Stock: $100 (neutral outlook)

Sell: 100 Call (30 DTE) for $3.00
Buy: 100 Call (60 DTE) for $5.00
Net debit: $2.00 ($200)

At 30-day expiration (short expires):

Scenario 1: Stock at $100 (ideal)

  • Short call expires worthless: +$3.00
  • Long call worth ~$3.50: -$1.50 loss from decay
  • Net profit: ~$1.50 (75% gain)

Scenario 2: Stock at $110

  • Short call: -$10.00 intrinsic
  • Long call: ~$12.00 value
  • Net: Small loss (moves hurt calendars)

Scenario 3: Stock at $95

  • Both calls OTM
  • Loss: ~$1.50 (both decayed, not optimal)

Post-earnings calendar:

Before earnings: Stock $100, front month IV 80%, back month IV 50%

Setup (day before earnings):

  • Sell 100 Call (7 DTE, through earnings) for $5.00
  • Buy 100 Call (37 DTE, after earnings) for $6.00
  • Debit: $1.00

After earnings: Stock at $102, IVs collapse

  • Front month (post-crush): $2.50
  • Back month: $5.00
  • Close spread for $2.50
  • Profit: $1.50 (150% gain) from IV crush

Rolling to next cycle:

Original setup:

  • Sold 30 DTE, bought 60 DTE

At 30 days (front expired worthless):

  • Own 30 DTE call worth $3.00
  • Sell 30 DTE call (now front) for $2.50
  • Debit: $0.50 to maintain
  • Collected: $3.00 from first short - $0.50 = $2.50 profit

Can repeat 2-3 times per long option.

Diagonal spread variation:

Instead of same strike, use different strikes:

Sell: 105 Call (30 DTE) for $2.00
Buy: 100 Call (60 DTE) for $5.00
Debit: $3.00

Benefits:

  • More directional (delta positive)
  • Cheaper debit (sell higher strike)
  • More flexibility

Trade-off: Less pure theta play, more directional risk

Vega risk example:

Calendar setup: $2.00 debit

Market volatility spike (VIX +10 points):

  • Front month IV: 40% → 60%
  • Back month IV: 30% → 45%

Both gain value but front gains more (shorter time):

  • Spread value drops to $1.50 (loss)
  • Vega risk: Front month vega > back month vega short-term

Calendars can lose in volatility spikes despite being "vega positive." ```

References​