Calendar Spread

The calendar spread is also known as the time spread or horizontal spread because this profits on time decay of options with different expiration dates.

The horizontal spread is called as such because the option months are listed on the exchange from left to right. The strike prices are top to bottom. The vertical spreads are the options with the same expiration but different strike prices.

In creating a long calendar spread, you will buy an option with longer expiration and then sell an option with the same strike price but shorter expiration. For example, supposing ABC stock is trading at $90 per share. To create a long calendar spread, you will sell the June 90 calls and then buy the July 90 calls. Take a look at this table:

ABC trading @ $90
ABC 90 Calls$9.00$13.00
Time to Expiration2 Months3 Months
Spread Value$4.00


The cost of creating this trade is $4. For the strategy to work, your option for June must lose its time premium before your option for July. The value of the option would increase if the stock price remains the same by June expiration. Take a look at the following table:

ABC trading @ $90
ABC 90 Calls$3.00$9.00
Time to Expiration1 Month2 Months
Spread Value$6.00


Here, you can close the option for one point by selling your options for July and buying back the June calls. For this to succeed, the price of the stock must be stable. Movement in either direction will negatively affect the time value of the options.

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