Want to Kill Some Time with Calendar Spreads? Learn the Setup, the Roll Decision, and the Risks

Calendar options spreads can be effective during sideways markets and during periods of low volatility. Here’s how to set up and roll a calendar—and a rundown of the risks.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Thumb-twiddling: Killing time with calendars
3 min read
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Key Takeaways

  • Options prices tend to decay more quickly as expiration approaches
  • With a calendar spread, as the expiration date nears for the front leg, a liquidate-or-roll decision becomes imminent 
  • Weekly options can provide flexibility when making a roll decision

If you’ve been trading for a while, you’ve likely lived through one of those low-volatility, “watching-paint-dry” markets. Instead of twiddling those thumbs, consider putting them to work on an options strategy designed for such a market.

Option traders interested in premium collection strategies—those that profit from time decay (“theta”)—often turn to short strategies such as iron condors or short verticals. These are considered “credit” trades, because the premium is collected up front. They’re designed to profit if the underlying stock stays within a certain range through expiration but may not be successful if the underlying falls outside that range. 

But there’s a debit options strategy—where the premium is paid up front—that also aims to profit from theta. It’s called the calendar spread. Calendars can be effective in times of low volatility and potentially useful if you think a stock or ETF will trend sideways in the near term. 

Interested? Here’s what you should know about managing calendar spreads, ideas on when calendar spreads may be useful, the potential profit and loss (P&L) points, and the risks.

Pitching a Tent (aka Setting Up a Calendar)

Calendars are created using any two options of the same stock, strike, and type (either two calls or two puts) but with different expiration dates. For example, if XYZ is $50, and you think it’ll trade in a tight range around $50 for a while, you might buy one July $50 call for $3 and sell one June $50 call for $2—also your maximum risk. You’d then be long a June/July calendar spread for a $1 debit (plus transaction costs). 

Stock = $50June: 30 Days Until ExpirationJuly: 60 Days Until ExpirationValue of Calendar
50-strike call$2$3$1
CALENDAR TRADE AT ONSET. Theoretical prices for a 50-strike call calendar with 30-day and 60-day options.  For illustrative purposes only.

How do you profit? If, as you expect, the shorter-term options decay at a faster rate than the longer-term options, the spread “widens,” and you may be able to close out the spread for a profit. All things being equal, if XYZ were to finish at $50 at expiration of the short options, your short options would be worth zero, while the long options might at that point be worth $2. Because your long spread has “widened” from $1 to $2, your profit, if you were able to sell to close that position, would be $1 (minus transaction costs). It’s not always this perfect, but that is the idea.

Stock = $50June: Zero Days Until ExpirationJuly: 30 Days Until ExpirationValue of Calendar
50-strike call$0$2$2
CALENDAR TRADE AT FRONT-LEG EXPIRATION. Theoretical prices for the June/July 50 call calendar 30 days later. For illustrative purposes only.

The P&L graph looks something like a tent, as maximum profits at the strike give way to lower profits sloping downward in both directions, eventually hitting break-even points before finally losing partial or full value (see figure 1). 

Figure 1: calendar spread tent

FIGURE 1: THE CALENDAR SPREAD TENT. Theoretical P&L graph for a long calendar spread. Note the point of maximum profit is right at the strike price (as of the date the short options expire). For illustrative purposes only. 

Now We’re Rolling

As expiration of that front leg nears, a decision needs to be made. Your short leg will soon expire, and if you do nothing before expiration, you could be left with half a spread. Plus, if your options are in the money (ITM) at expiration, are you prepared to either deliver the underlying or take a short position in it?

You might consider liquidating the entire spread by closing out both legs. But there’s another idea: Rolling calendar spreads. The term “rolling” simply means moving options from where they are now to somewhere else. That could be a different expiration date, a different strike, or both. 

When the short options in a calendar spread are nearing expiration, you might decide to roll them out to the same strike with another expiration date. This can be accomplished by buying your short options to close and selling to open the same strike on another expiration date. Just make sure the expiration you roll to isn’t further out in time than your long options. Remember, the rationale of a calendar spread is positive theta—nearer-term options generally decay at a faster rate than longer-term options—so if your new short leg has more time until expiration than your long leg, this would likely be a negative-theta position.

Here’s an example using the theoretical options values from the table below. Let’s say you’re long the 50-strike call with 29 days until expiration and short the 50-strike call that expires in one day. A roll would involve buying the expiring options to close and selling another 50-strike call with options that have fewer than 29 days left until expiration. Because this roll involves selling options with more time to expiration than the options you’re buying to close, you should be able to roll for a credit. You also need to consider the transaction costs and margin requirements on the new position.

Days to Expiration50-Strike Call ValueCurrent Options PositionOptions Order to Roll Position
1$0.50ShortBuy to close
8$1.25-Sell to open
15$1.55-OR sell this one?
22$1.80-OR this one?
29$2Long-

THE ROLL DECISION: WHICH OPTIONS? Weekly options allow flexibility in the roll decision. Because they are short-lived instruments, weekly options positions require close monitoring, as they can be subject to significant volatility. Profits can disappear quickly and can even turn into losses with a very small movement of the underlying asset. For illustrative purposes only. 

Choosing a Strike

Which expiration you decide to roll to is up to you. There are no hard-and-fast rules, and like most options trading decisions, there are trade-offs. Options decay more quickly the closer you get to expiration; that’s the nature of theta. So you might choose to roll to the eight-day options. And assuming the underlying has stayed in a range near the 50 strike, you might be able to roll it again next week, and the next week. With weekly options, there’s an expiration on any given Friday. You might look to continue each week until you get to your long strike. At that point, you’ll likely want to liquidate both legs of the spread. Keep in mind, there’s no guarantee of a secondary (liquid) market for any option at any given time.

The potential issue with this strategy is transaction costs. The more often you place a trade, the more often you’ll incur costs. So you might instead decide to roll to the 22-day options. The premium, and thus the credit you’ll receive, is higher than it is for the eight-day options, but you won’t have as many opportunities to repeat the process before it’s time to liquidate the entire spread.

Other factors in your decision could include:

  • Has the underlying strayed from your strike? If so, you might want to consider a different strike—theta is typically greatest in the at-the-money (ATM) strike. But remember: Changing strikes will affect price expectations and may impact margin requirements as well.
  • Is there an earnings release or other news pending in the underlying? This can mean higher implied volatility, which generally translates into a higher-than-normal price for short-term options but can also mean excessive price fluctuation right when you’re looking to roll the position. Some option traders like trading around earnings; others try to avoid it.  

Calendar spreads can be effective in times of low volatility and are potentially useful if you think the underlying might stay within a tight trading range in the near term. The mechanics of setting up and rolling calendar spreads might seem intimidating at first, but after you break them down into individual parts and individual decisions, you might consider giving this strategy the thumbs-up, especially during those low-volatility, thumb-twiddling markets.

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Key Takeaways

  • Options prices tend to decay more quickly as expiration approaches
  • With a calendar spread, as the expiration date nears for the front leg, a liquidate-or-roll decision becomes imminent 
  • Weekly options can provide flexibility when making a roll decision

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