A Call Calendar Spread (also known as a Time Spread) is a strategy that involves selling a short-term call option and buying a longer-term call option at the same strike price.
It’s designed to take advantage of differences in time decay (theta) and volatility between two expiration dates.
How It Works
Sell 1 near-term call
Buy 1 longer-term call at the same strike
If the underlying stays near the strike as the short call expires, you can benefit from the faster time decay of the sold option.
Profit and Loss Profile
Maximum Profit: Often occurs if the underlying is near the strike when the short call expires and the long call still retains value. Profit is limited by the long call’s retained value minus the initial net premium paid.
Maximum Loss: Limited to the net premium paid (long call premium minus short call premium).
Breakeven: Depends on net premium paid and time decay; there are typically two break-even regions as expiries roll forward.
Why Traders Use It
To capture time decay on the short leg while maintaining long-term directional exposure.
To trade a market view where near-term price is expected to be stable but longer-term volatility or direction is uncertain.
To express a calendar/volatility view when the front-month implied volatility is rich relative to longer-dated IV.