Watch the reel
A calendar spread sells a near-term option and buys a longer-dated one at the same strike, profiting as the front leg decays faster. This reel shows the P/L at the front expiry, where the back leg still holds time value.
Calendar Spread
Sell a near-term option and buy a longer-dated option at the same strike. You're long the back-month theta differential and long vega.
Payoff at expiration
Example legsGreeks
When to use it
Neutral on direction, expecting a rise in IV (or pre-event IV expansion), and willing to live with the front-leg expiration management.
Setup
Same strike, near-term expiration on the short leg, further-out on the long leg. Calls and puts produce equivalent payoffs at the same strike (use whichever is more liquid).
Steps
- 1Pick a near-term expiration (weekly or 30 DTE).
- 2Pick a longer-dated expiration (45–90 DTE).
- 3Sell the near-term at the chosen strike.
- 4Buy the longer-dated at the same strike.
- 5Submit as a single combo at a limit debit.
Cost
Net debit (long leg costs more than short). Max loss = debit (occurs if spot moves far from strike before short expiration).
Effect of price
Best at the strike on the front expiration; falls off symmetrically as spot moves away.
Effect of time
Front leg decays faster than back leg (you want this), so theta-positive overall.
Effect of volatility
Long vega — a rise in IV helps the back leg disproportionately.
Pros
- Defined risk for the debit paid.
- Theta-positive (front leg decays faster).
- Long vega — useful pre-event setups.
Cons
- P/L is path-dependent — sharp moves before front expiration kill it.
- Two expirations to manage.
- Vol-curve assumption is doing a lot of the work.
Tips
- Strike selection matters more than direction; choose where you think the underlying will be.
- Close before front-expiration if the trade is profitable — front-leg gamma explodes at expiration.
- Use calendars on names with low IV that may expand — they're a vol play, not a direction play.
The math
P/L is a function of the term-structure IV spread. Max loss = debit. Profit profile peaks at the strike at front-leg expiration.
Not investment advice.
