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One of the big advantages to trading options is the fact that profits can be made in sideways trading markets. There are various strategies that profit from sideways trading, with the calendar spread a popular choice.

The calendar spread gets its name because the month of expiration for the spread is different, while the strikes remain the same. A calendar spread consists of selling short-term option and buying a long-term option. Either calls or puts can be used, depending on which provides the best reward to risk ratio.

The general idea when using option is to sell high implied volatility [IV] and buy low IV. This might seem like a paradox when talking about calendar spreads, as we are selling and buying options at the same time. However, short-term options often see spikes in IV that does not impact longer-term options, or at least not as much. If a trader expects a stock or index to consolidate before moving higher, they could enter a call calendar spread. This would decrease the cost of the long-term option, much like using a covered call.

When looking for calendar spread candidates, it is good to look for stocks that have shown a lot of volatility, but that look ready to consolidate. Large drops in a stock often spike front month IV and these stocks tend to consolidate after the large move. These are perfect candidates for calendar spreads. A calendar spread can also be adjusted each month. If the stock is expected to stay in the area of the strike price, a trader can sell options each month, eventually paying off the long option.

The basic idea is to use at-the-money [ATM] or slightly out-of-the-money [OTM] options. The long-term options cost more than the front month options, so the trade will be opened with a debit. As time passes, the front month option loses value much faster than the long-term option. If IV also falls on the front month option following a spike, it can create nice profits in the short term.

Overall, calendar spreads can be used to pay down the cost of a longer-term option, or can be used to make a quick profit on a high IV option that is looking to consolidate. Either way, calendar spreads make a great addition to almost any trader’s plans, so take a look at it and paper trade the strategy to see how it works for you.


Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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