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Calendar spread

Selling a short-dated option and buying a longer-dated one at the same strike — a bet on time decay and stable prices.

A calendar spread involves selling a short-dated option and buying a longer-dated option at the same strike, usually with calls or puts of the same type. The idea is to profit from time decay: the near-term option you sold loses value from theta faster than the longer-term option you own, so the gap between them can widen in your favor while the underlying sits still.

In practice, a trader who expects a stock trading around 100 to stay near that level might sell the front-month 100 call and buy a back-month 100 call. If the stock hovers around 100 into the first expiration, the sold call expires cheap while the long call retains value, and the position can be closed for a net gain.

The common mistake is ignoring vega. A calendar is long vega, so a drop in implied volatility hurts it even when the price behaves. Big moves away from the strike also erode the trade, since your maximum value sits right at the strike.

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