Time Spread

A time spread, also called a calendar spread, is an options strategy built from two options of the same type (both calls or both puts) and the same strike price, but with different expiration dates. The trader sells the option that expires sooner and buys the option that expires later, paying out of pocket for the difference since the longer-dated option is almost always more expensive.

The strategy works because options lose value as they approach expiration, a process called time decay, and that decay happens faster for near-term options than for far-dated ones. By selling the near-term option, the trader collects premium that erodes quickly in their favor, while the longer-dated option they hold decays more slowly, cushioning the position. If the underlying stock or index stays near the strike price through the front option's expiration, the trade tends to profit as the short option shrinks toward zero while the long option retains more of its value.

The nuance that trips people up is that a time spread is a bet on where the price will be at a specific point in time (when the near-term option expires) combined with a bet on volatility, not simply a directional bet on the stock going up or down. It also is not a "free" trade: the trader pays a net debit upfront, and that debit is the maximum possible loss if the underlying moves far away from the strike. After the short option expires, the trader is left holding the longer-dated option alone, which then behaves like an ordinary single-option position exposed to further price swings.

Because both legs share a strike price and only differ in expiration, this is distinct from a diagonal spread, where strikes also differ, and from a vertical spread, where expirations are the same but strikes differ.