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Stock Market · Option Strategies

Calendar (time) spread

A calendar spread involves selling a near-term option and buying a longer-dated option at the SAME strike. You're trading time. The near-term option decays faster than the far-dated one.

Construction

Example: Nifty at 22,000.

• Sell 22,000 call expiring next Tuesday @ ₹200
• Buy 22,000 call expiring the month after @ ₹320
• Net debit: ₹120

How it makes money

Theta (time decay) works differently on near-term vs far-term options.

• Near-term ATM option: loses value very fast in the last week before expiry.
• Far-term ATM option: loses value slowly. It has much more time.

If Nifty stays at 22,000, the short near-term call decays to near-zero. The long far-term call retains most of its value. The spread widens, you profit.

Calendar spreads are volatility bets too. They also profit if implied volatility rises. The long far-term option benefits more from IV expansion than the short near-term option.

Risk

• If Nifty moves sharply in either direction, both options lose value but the short option (which is negative delta) may cause loss.
• IV collapse hurts, if IV falls, the long option loses more value than the short.

Practical use

Calendar spreads are most effective in low-volatility, range-bound environments. They're also used when IV is low. Anticipating a rise in IV before a major event.

Takeaway. Calendar spread: sell near-term option, buy same-strike far-term option. Profits from differential time decay and IV expansion. Best in quiet markets. Sharp moves hurt the position.