Calendar Spread

A calendar spread is an options strategy where a trader buys and sells two options of the same type (both calls or both puts) and the same strike price, but with different expiration dates. It's built from two legs: a shorter-dated option that gets sold (written) and a longer-dated option that gets bought, both on the same underlying stock or index.

The trade works because options lose value as they approach expiration, a process called time decay, and that decay isn't linear — it accelerates in the final weeks and days before an option expires. The near-term option a trader sells decays faster than the longer-term option they hold, so if the underlying price stays roughly near the strike price, the short-term option can lose most of its value while the long-term option retains more of its own, leaving the trader with a profit on the difference.

The nuance that trips people up is that a calendar spread is not simply "a bet that time passes." It's a bet on where the underlying price will be relative to the strike when the near-term option expires, combined with a view on volatility. If the stock moves sharply away from the strike, both options move in ways that can erase the expected gain, and if implied volatility (the market's expectation of future price swings, priced into the option) drops on the longer-dated option, that hurts the position even if the price and time decay work out as expected.

Because calendar spreads involve two expiration dates and options pricing that depends on volatility as well as time, they behave differently than a simple directional stock trade and require monitoring both legs, not just the stock price.