Time spread or calendar spread is a complex options strategy where one writes an option of short expiry and buys an option of greater expiry having the same strike and underlying, utilizing the difference in time decay (theta) between the two, making profits as the short expiry option loses value at a higher rate. This unplanned strategy performs extremely well when a trader does not see much activity occurring in the underlying stock in the near term but does foresee potential movement or volatility in the immediate future, and thus is a good plan to follow when there is little volatility or volatility is ready to soar. For instance, the investor may sell a one-week call and purchase a one-month call with identical $100 strike, creating a long calendar spread. In the long term, the short call loses value quickly with theta decay, but the longer call retains a majority of its value so that the spread increases. Best option strategy for weekly income is desirable by being at or close to the strike price, as most of the gain is realized when the underlying stock expires at or close to the short option’s strike. Calendar spreads with calls or puts and different strikes can be utilized by investors to establish bullish or bearish biases.
One of the best things about calendar spreads is that they are very low-cost; net debit positions reveal structured risk, and on implied volatility skews, the trade may even turn out to be slightly profitable when opening if IV in the front month is high. Moreover, calendar spreads are also sensitive to the rise in implied volatility of the back month, which can increase the long option premium and expand the value of the spread. However, they are negatively impacted by volatility crushes or surprise large price movements in the underlying asset, causing the outside price to go down and the profitability to lessen. Investors employ different calendar spreads at different strikes (diagonal spreads) to create income-generating machines that meet their expectations of the market. Timing and choice of strikes are critical—putting the strike close to the expected price at expiry and choosing expiration dates with high volatility differentials makes performance much better. The Greeks, vega and theta most notably, are at the heart of managing calendar spreads, and one would notice how the evolving conditions in the market impact both legs. One of the methods to hedge or adjust the position is through rolling the short option forward as it does approach expiration, lengthening the life of the trade and accumulating more time decay while keeping the long option.
Calendar spreads can be employed in indexes such as SPY or stocks such as AAPL and therefore are highly powerful speculative trading and revenue generation tools. To expert traders, it provides sophisticated tools to take advantage of time, volatility, and price convergence. To beginner traders, calendars can be employed to enjoy the subtle relationship between options with differing expiration dates and risk management without over-leveraging. The true strength in calendar spreads is that they are able to offset market neutrality with decent theta, and it makes setups where patience, form, and understanding of the impact of time on worth are assets.