What is a Calendar Spread?
A calendar spread (or "horizontal spread") is long a long-dated option and short a short-dated option at the same strike. It expresses a view on term structure and on near-term theta.
Definition
A typical long calendar: buy 1 ATM call 60-days-out, sell 1 ATM call 30-days-out, same strike. The short front-month call collects fast theta; the long back-month call retains vega. The net P&L profile is short gamma in the short term (spot stability is good) and long vega in the medium term. Maximum gain at expiry of the front leg is when spot is exactly at the strike — the front call expires worthless (you keep the premium), and the back call retains its time value. Calendar spreads are mainly term-structure trades: they benefit when long-dated IV rises relative to short-dated IV (term structure steepens) or when realised vol stays low through the front-leg expiry.
Why it matters & how it's calculated
Greeks decomposition at inception: net theta positive (front leg bleed exceeds back leg), net vega positive (back leg vega > front leg vega), net gamma negative (front leg gamma > back leg gamma), delta near zero (both legs ATM). The position is short skew if implemented with OTM calls (because call skew tends to be inverse), short crash if implemented with puts (back put gains less than front put loses in a crash). Three things kill a calendar: (1) a big spot move before front expiry (gamma loss exceeds theta gain), (2) a vol crush in the back month (kills the vega leg), (3) early roll-down of the back-month vol along the term structure (silent killer if you don't watch it). The "double calendar" (call calendar + put calendar at different strikes) extends the pin zone; the "diagonal" (different strikes across the legs) introduces a directional bias. Calendars are the workhorses of small vol books — capital-efficient, defined risk, theta-positive, but with a real volatility-of-volatility tail.
Worked example
SPX at 5,000. You sell 1 SPX 5,000 call 30-days-out at $30 IV ($45 premium), buy 1 SPX 5,000 call 60-days-out at $32 IV ($72 premium). Net debit $27. If SPX pins at 5,000 on day 30: the front expires worthless, you keep $45 of premium. The back-month call is worth roughly $45 (30-day ATM, $32 IV minus small vol decay). Net position value ≈ $45, vs $27 debit → P&L ≈ $18 per share. If SPX rallies 100 points fast: front gains $50 (you owe $50), back gains $55 (you have $55), net $5 — your gamma loss eats most of the move.
Related concepts
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