Calendar Spread

Sell a near-term option and buy a longer-dated one at the same strike to profit from time decay and rising volatility.

A calendar spread (time spread) sells a near-term option and buys a longer-dated option at the same strike. It profits from the faster time decay of the front-month leg and from rising implied volatility.

Market outlook

Neutral near term (you want the stock to sit near the strike as the front leg expires) but open to a longer-term directional lean, plus a view that IV will rise or hold.

Construction

• Sell 1 option (call or put) at strike $K$, near expiry.
• Buy 1 option of the same type at the same strike $K$, later expiry.
• Net debit $D$ (the longer-dated option costs more).

Why it works

Theta decays faster for the near-term short leg than the long-dated leg you own:

$|\Theta_{near}| > |\Theta_{far}|$

so the spread gains value when the stock sits near $K$. It is also long vega — a rise in IV helps the longer-dated leg more.

Risk / reward

• Max loss: the debit $D$ paid (a big move away from $K$ in either direction hurts).
• Max profit: realized near $K$ at the front-month expiry; not a simple closed form because it depends on the remaining option's value.

Risks & management

• Vega risk cuts both ways: an IV drop hurts.
• Profit zone is centered on $K$ — manage or roll the short leg as it approaches expiry. This is a more advanced, multi-variable trade than the verticals above.