Calendar Spreads

A calendar spread strategy, also called horizontal or time spread, is achieved using simultaneous long and short positions in options of the same type (both calls or both puts) of the same strike, but different expiration dates.


Using calls, a calendar spread strategy is constructed through a long position in a call option that matures at T2 and a short position in a call with maturity T1 lower than T2. Both options have the same strike price K. Buying a calendar spread strategy requires an initial cost equal to Call (K, T2)  – Call (K, T1). Note that the value of this strategy is in fact equal to the difference between both options’ time values since the intrinsic values are the same at any point of time t.


A calendar spread can be bullish, bearish or neutral depending on the chosen strike.


The calendar spread strategy can also be used to take advantage of the volatility spread between the two options. And since the time value of the option with the lower maturity decreases faster than the longer maturity option, the investor could be willing to close his time spread position by selling at a higher price than the initial cost.


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