Options Academy
Calendar Spreads 101: The Time Arbitrage
Most spreads trade price. This one trades time. Learn how to exploit the different decay rates of near-term vs. long-term options.
Trading Time, Not Price
A Calendar Spread (or Time Spread) involves selling a near-term option and buying a longer-term option with the same strike price.
The Logic: Option time decay (Theta) is non-linear. An option with 30 days left decays much faster than an option with 90 days left.
You are selling "fast decay" and buying "slow decay". If the stock stays still, the short option rots away faster than the long option, and the spread widens (increases in value).
Example: The XYZ Time Spread
Stock XYZ is trading at $50 in January.
1. Sell April 50 Call for $5.00 (3 months left).
2. Buy July 50 Call for $8.00 (6 months left).
Net Debit: $3.00 ($8 - $5).
This is your max risk. You can never lose more than you paid.
Short Leg (Sell)
April 50 Call
Long Leg (Buy)
July 50 Call
Net Debit
$3.00
Time Gap
3 Months
The Magic of Expiration
Fast forward to April. XYZ is still $50.
Short Call (April): Expires worthless ($0). You keep the full $5.00 profit.
Long Call (July): Still has 3 months left. It might be worth ~$5.00.
Result: You own a $5.00 asset that cost you net $3.00. You made a $2.00 profit just by waiting.
Key takeaways
- Calendar Spreads involve the same strike but different expiration months.
- They profit from the faster Theta decay of the near-term option.
- Max risk is limited to the debit paid.
- Ideal scenario: The stock price is exactly at the strike price when the short option expires.
Series
Calendar Spread Masterclass
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