How a calendar spread makes money
A calendar spread (also called a time or horizontal spread) sells an option that expires soon and buys one at the same strike that expires later. The near option loses value faster than the far one, especially in its last weeks. If the shares sit near the strike when the near option expires, it expires worthless and you still own a far option with plenty of time value left.
Unlike a vertical spread, a calendar has no fixed payoff at the near expiry, because the far leg is still alive. Its value then depends on the share price, the time remaining and, above all, implied volatility. This calculator values the far leg with Black-Scholes at the volatility you enter.
P&L at near expiry = value of far option − intrinsic value of near option − net debit
A worked example
With the figures loaded above, the shares are at $100. You sell the 30-day 100 call for $3.00 and buy the 60-day 100 call for $4.35, a net debit of $1.35 ($135 per spread). That is the most you can lose.
- If the shares are exactly $100 when the near call expires, it is worthless and the far call, with 30 days left at 25% volatility, is worth about $3.02. The spread makes about $167, 124% on the debit.
- The estimated breakevens are about $96.05 and $104.91. Outside that range the far option’s remaining time value no longer covers the near option’s intrinsic value plus the debit.
The profit tent is narrow. A calendar is a bet that the shares stay close to the strike, with a smaller cost and a smaller maximum loss than an iron condor, but much more sensitivity to volatility.
The volatility problem
The far leg is long vega. If implied volatility falls by the time the near leg expires, the far option is worth less at every price and the whole profit tent sinks. Try lowering the volatility field from 25% to 20%: the peak falls and the breakevens move in. The reverse is true if volatility rises.
- Earnings between the expiries inflate the far leg’s volatility. After the report, it collapses. Calendars placed across earnings need that crush priced in.
- Different volatilities per expiry. Near and far options rarely trade at the same implied volatility. The premiums you enter carry that information; the volatility field only values the far leg afterwards.
- Puts or calls. At the same strike they behave much the same. Puts below the price or calls above it make the spread mildly directional.
- Assignment. If the near leg is in the money near expiry it can be assigned early, especially calls before a dividend.
Read more on how Greeks and breakevens interact in where an option actually breaks even, or price any single option in the Black-Scholes calculator.