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Glossary of Terms and Strategies for Options Trading

Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.

Strategy

Advanced, Income, Hedging, Speculation

Calendar Spread

Using different expiration times to profit from time decay (theta) and price movement.

Detail

Calendar Spread is a strategy where we simultaneously buy and sell options on the same strike, but with different expirations. Usually we buy longer-term (LEAPS, 60+ days) and write shorter ones (e.g. 30 days). This way we profit from the faster time decay of the nearby option (theta) and use the difference in the price of the options. Calendar is suitable when the underlying is expected to stagnate in the near term, but at the same time move in the longer term.

Calendar spread uses the different rate of time decay between short and long options. For example, we buy a call with an expiration in 60 days and write a call on the same strike with an expiration in 30 days. If the underlying price remains near the strike, the short option quickly loses value, while the long option retains its value. The strategy thus profits from decay (theta) and stable volatility. It can be built as a call or put calendar, or neutrally (straddle calendar).

Optimal conditions

It works best when we expect minimal movement of the underlying around the strike until the expiration of the short option. Suitable for medium to high IV on the short option, lower IV on the long one (volatility skew).

Max profit

Limited: maximum profit if the underlying price remains at the strike at the expiration of the short option. We profit from the rapid decay of the short option. Profit limited by the difference in time value. We are preparing to close the entire spread as a whole.

Max loss

Limited to the premium paid (debit). If the price of the underlying increases or decreases significantly, both options lose value and the premium is lost.

Risks

Rapid movement of the underlying outside the strike (up/down). A decrease in IV for a long option can reduce the value. Risk of wrong strike setting (outside the expected zone). Need to monitor price development.

Greeks

Delta: usually close to zero (neutral). Theta: positive (short option listing). Vega: negative (not beneficial to a decrease in volatility). Gamma: negative near expiration.

Variations

Call Calendar, Put Calendar, Straddle Calendar (both legs of the ATM), Diagonal Spread (if different strikes), Double Calendar (on both sides of the market).

Usage example

XYZ stock is at $100. We expect it to stay around $100 for the next 30 days. We buy 1x call strike 110 ex. in 60 days and write 1x call strike 110 ex. in 30 days. We will make a profit if the price stays just below $110 because the short call will lose value faster and the long call will not lose or gain value. If the price increases/decreases significantly, both options may lose value.

DTE

Short option: 20–45 days to expiration. Long option: 60–120 days (sometimes LEAPS for longer horizon).

IV (implied volatility)

Ideally, if the IV on the short option is higher than the IV on the long option (volatility skew). Watch out for a drop in the IV of the long option, which would reduce the value.

Premium

Debit strategy – we pay the difference between the long and short option. The premium depends on the strike, expiration and IV.

Margin

It does not require margin on the statement (long calendar) because the long option covers the statement.

Notes

Suitable for advanced traders. Works best when the market is stagnant. Can be combined with directional speculation (diagonal spread). Need to monitor the movement of the underlying and IV.
No profit/loss graph is shown for this strategy, as it combines options with different expirations. After the short leg expires, the position behaves like a naked long option.
For further evolution of the position, see the payoff profile of a naked long option.

calendar spread, time spread, horizontal spread, call selling, call purchase, put selling, put purchase, theta, time decay, volatility spread.