Calendar Spread: Trading the Term Structure of Volatility
A calendar spread sells a near-term option and buys a longer-dated option at the same strike. Net debit. Profits from time decay differential — the near-term option decays faster than the long-term option, leaving a net positive theta position.
Setup: sell a 30 DTE option, buy the same strike at 60–90 DTE. Best deployed at-the-money when IV is low and the underlying is expected to stay near the strike. The position benefits from rising IV (vega-positive overall because the long-dated leg has more vega than the short leg) and from the underlying pinning to the strike at near-term expiration.
Risk: the underlying moving sharply away from the strike crushes the position because both legs become deep ITM or OTM, and the long leg's extrinsic value (where the position's value lives) compresses. Calendar spreads are not range-trade strategies — they're pin-trade strategies. Choose the strike with this in mind: where do you expect the stock to be at the near-term expiration?
Frequently Asked Questions
Calendar spread or short strangle for low IV?
Calendar spread when you expect IV to expand. Short strangle when you expect IV to stay low. Both are theta-positive but have opposite vega exposure.
Should I roll the short leg after expiration?
Yes — if the long leg still has time value and the underlying is near the strike, rolling the short leg into a new near-term expiration is the classic calendar management approach.