Options Income
Calendar Spread
Sell a near-term option, buy a longer-dated option at the same strike, and let the near-term one decay faster than the far one. The trade profits from that decay gap, not from picking a direction.
Two decay curves, one spread
The steep line is the near-term option you sold, falling toward zero as its own expiration approaches. The shallow line is the longer-dated option you bought, still holding value at that same point in time. The gold line is the difference between them, the value of the spread itself, rising as the front month decays away faster. Scrub the day slider, then use the price slider below to see what happens if the stock isn't sitting at the strike when front-month expiration arrives.
How it works
- Same strike, two different expirations. The short leg is a front-month option, roughly 30 days out here. The long leg is a back-month option at the same strike, roughly 90 days out. Both cost money to buy, but only the front one was sold to fund part of it, so the trade opens as a net debit.
- The whole trade is a bet on the decay gap, not on direction. An option loses time value faster the closer it gets to its own expiration. With 30 days left on a 30-day option and 90 days left on a 90-day option, the front leg is decaying much faster in percentage terms than the back leg, and that gap is what the net spread value curve is tracking.
- Maximum value shows up if price is sitting right at the strike when the front month expires. At that point the front option is worthless (assuming it finished exactly at the strike) and the back option still holds real extrinsic value. That's the peak of the price-slider curve above.
- Move away from the strike in either direction and the value gives it back. Both legs move together once price is away from the strike, since they share intrinsic value, so what's left is the back month's remaining extrinsic value, and that shrinks the further price wanders. That's why the price curve looks like a hill centered on the strike instead of a straight line.
Where this breaks
Pin risk on both sides, and a volatility crush that hits the leg you're holding
Drag the price slider even a modest distance from the strike and the spread's value collapses toward a small fraction of what it's worth pinned at the money. A single earnings gap or a fast trending move blows through the whole reason the trade was put on. There's a second, quieter risk the price slider doesn't show directly: the back-month leg is a long option, and if implied volatility drops after the position is opened, that leg's remaining value drops with it even if price never moves at all, shrinking the exact cushion this trade depends on.