Calendar Spread Strategy: Definition, Examples, and How to Use It

Trading without a proper strategy is never a good idea. This can lead to losses, and at times, you might miss the key movements that are happening in the stock market. This is more common when you are trading in the futures and options. 

One such strategy is the calendar spread strategy. This is often used when traders want steady control over time decay and expect only mild price movement. For many traders, it acts as a balanced approach that reduces risk and offers steady returns over time.

But the question is what is calendar spread strategy is and why you should be using the same. At the same time, it is important to know the double calendar spread strategy. So, let us explore all the details you need in the guide here.  

What Is Calendar Spread Strategy?

A calendar spread strategy is an options setup. It is one of the options trading strategies where you buy a longer-term option and sell a shorter-term option at the same strike price. Both the trades that you do in this use the same underlying asset. 

The goal is to benefit from the faster time decay in the short-term option while the long-term option holds more value. Traders prefer this structure when they expect the price to stay near the strike, while time decay works in their favour.

Features

Some of the key features of the same are as follows:

• The same strike price is used for both options, which keeps the structure easy to track.

• Different expiry dates create the time decay gap that traders aim to benefit from.

• Lower upfront cost, which makes this a better choice compared to just one option.

• Good for low volatility markets, which work in a range. 

• Profit potential increases when the underlying stays close to the strike near the short expiry.

How the Calendar Spread Strategy Works

A calendar spread option strategy uses the gap in time decay between two options with the same strike but different expiries. The short-term leg decays faster. This way it helps you to reduce the cost and ensures that you can stabilise the returns. 

The steps to know about the working are as follows:

Step 1: Select The Strike Price

Choose a strike that is close to the current market price. A calendar spread option strategy works best when the price stays near this level during the short-term expiry.

Step 2: Sell The Short-Term Option

Sell the near-expiry option first. This is the leg that decays faster and helps lower your cost through premium, which is the core idea behind most calendar spread strategy examples.

Step 3: Buy The Longer-Term Option

Buy the later expiry option at the same strike. It decays more slowly. This provides stability to the structure. This behaviour is similar to how pricing works in a calendar spread futures strategy.

Step 4: Monitor Price Movement And Volatility

The strategy performs well in calm markets. When the price stays close to the strike and volatility remains low, the time decay gap becomes more profitable for the overall calendar spread option strategy.

Step 5: Close, Roll, Or Extend The Position

You can close both legs near the short expiry or roll the short leg forward. Traders may also expand it into a double calendar spread strategy when market conditions remain stable.

Calendar Spread Strategy Example

Suppose a stock is trading at Rs. 1,000 and you expect it to stay close to this level for the next week. You sell a near-expiry call option at the 1,000 strike for Rs. 20 and buy a next month call option at the same strike for Rs. 40. As days pass, the short-term option decays faster and loses most of its value, while the longer-term option holds value. The profit comes from this time decay gap.

Pros of Calendar Spread Strategy

There is no doubt that the calendar spread strategy is one of the best. In fact, the best options trading brokers usually suggest using this to help their clients earn better. But there are other reasons as well. The pros are as follows:

• Lower cost compared to buying a single long option since the short leg reduces the net premium.

• Works well in stable or low volatility markets where time decay becomes predictable.

• Limited risk structure that helps traders manage uncertainty more comfortably.

• Profit potential increases when the price stays near the strike during the short expiry.

Cons of Calendar Spread Strategy

The strategy relies heavily on price stability and volatility behaviour. Sudden movements can reduce the benefits of time decay and lead to losses. Here are the main cons.

• Limited profit range as profits fall when near the strike price.

• Losses can occur if volatility drops too sharply and affects option pricing.

• Not suitable for fast-moving markets.

• Consistent monitoring is needed when nearing expiry.

Difference Between Calendar Spread and Double Calendar Spread

Many traders in the NSE and BSE have heard of these two strategies. While many confuse these two are similar in nature, there are certain points of difference that you should know of. The most common points of difference to know are as follows:

Conclusion

The calendar spread strategy gives traders a clear way to use time decay without taking big directional risks. It works well when the market is stable, and pricing stays near the strike. This makes it a useful choice for anyone who wants controlled exposure at a lower cost. If you want to study more strategies, compare setups, or trade with confidence, start exploring advanced tools and learning guides on Rupeezy today.

FAQs

What is a calendar spread strategy?

It is an options setup that uses two expiries at the same strike to benefit from time decay.

Is a calendar spread suitable for beginners?

Yes, because it offers limited risk and a simple structure.

Can a calendar spread lose money?

Yes, if the price moves far from the strike or volatility changes sharply.

Is a double calendar spread better?

It offers a wider profit zone but has a higher cost and more complexity.

When is a calendar spread most effective?

It works best in calm, low volatility markets close to the strike level.