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L.4 · ADVANCED · 2 MIN

Calendar Spreads and Diagonal Spreads

Calendar spreads exploit the fact that near-term options decay faster than longer-term options. By selling the near-term and buying the longer-term at the same strike, you profit from the differential theta decay.

Quiz · 5 questions ↓

Compare

Spread TypeStructureProfits FromRisk
Calendar (same strike)Sell near-term, buy far-term (same strike)Theta differential + stable IVStock moves far from strike
Diagonal (diff strike)Sell near-term OTM, buy far-term at different strikeTheta + moderate directional moveLarge adverse move + IV collapse

Key point

Calendar spreads benefit from rising IV (long option’s vega > short option’s vega). This makes them particularly attractive before anticipated volatility events when you want to be long vega.

Try it

Compare the theta of a 30-day ATM option vs. a 90-day ATM option on the same stock. The 30-day decays faster — that’s the edge you’re capturing with a calendar spread.

Check-in

You set up a calendar spread (sell 30-day, buy 90-day) and the stock barely moves. Is this good or bad?

Key insight

The biggest risk in calendar spreads is a large stock move in either direction. When the stock moves far from the strike, both options lose value, but the long option (which cost more) loses more in dollar terms.

Check-in

Calendar spread: sell 30-day ATM call + buy 60-day ATM call, same strike. Profits when?
Check your understanding

Sit with the ideas.

You buy a 90-day $100 call for $7 and sell a 30-day $100 call for $3.50. Net cost is $3.50. In 30 days (short call expiration), the stock is at $100. The 60-day $100 call is now worth $5.50. What is your P&L?

Why:
Continue this lesson in the appAdaptive practice · saves your progress · remediation when you miss

Other lessons in this course.

  1. 01Vertical Spreads: Defined Risk Directional Bets
  2. 02Iron Condors: Profiting from Range-Bound Markets
  3. 03Straddles and Strangles: Trading Volatility
  4. 04Calendar Spreads and Diagonal Spreads— reading now
  5. 05Options Risk Management: Position Sizing and Portfolio Greeks
  6. 06The Volatility Surface and Skew: What Each Strike's IV Tells You
  7. 07Risk-Reversals and Butterflies: Building Direct Bets on Skew and Convexity
  8. 08Dispersion Trades: Index Vol vs Single-Name Vol and the Correlation Bet
  9. 09Gamma Flip and Dealer Gamma: Reading Market Commentary About Options Positioning
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